Cost of living

We all know we’re feeling the pinch, but here’s how

We all know that the cost of day-to-day life is going up, but it’s not always possible to quantify the effect it is having on different areas of our lives.

A study from the Government’s Office of National Statistics (ONS) gave some clues this week as to how the relentless onslaught of price rises is affecting the nation. They were quickly followed up by figures showing that we’re all paying far more tax, so it is unsurprising that we are feeling poorer.

The cost-of-living figures come from March, so they do not even include April’s increase in energy prices, which will have knock-on costs in other areas too, and they have found the following:

  • Nine in ten adults said that living costs had risen month-on-month in March, compared with six in ten this time last year.
  • A quarter say that it was very difficult, or difficult, to pay bills, and four in ten said that energy bills, in particular, were unaffordable
  • 43 per cent of people said that they would not be able to save in the current climate – the highest percentage since this survey began in 2020.

A higher tax burden too

But if we are all feeling poorer, increased prices are not the only cause. Figures from HMRC pushed out on Tuesday revealed that the Treasury received nearly a quarter as much again in various taxes in 2021/22 as they did in 2020/21, an all-time high of £718.2 billion.

We’re paying more for almost every tax, with jumps in receipts for Inheritance Tax (IHT), stamp duty and VAT as well as income tax, national insurance and capital gains tax.

One of the few taxes we are paying less of is Air Passenger Duty, reflecting the fact that fewer of us are flying.

These figures, too, do not include the increase in National Insurance that came in April, which will further increase the tax burden for many of us.

How can we deal with it?

When inflation rises and tax changes increase the amount you pay to the Treasury, everyone has to tighten their belts, but there are plans you can make to ensure you keep more of your take home pay, as well as keeping your financial plans on track.

A good financial adviser will help you to make sure you are not paying too much tax, and ensure you make the most of generous tax breaks available. These could include:

  • Paying into your pension via a salary sacrifice scheme so that less of your money is lost to the national insurance increase and you still make the most of tax relief on your earnings, particularly at the higher level
  • Using your annual tax-free savings allowances so that you do not end up paying increased dividend tax above the £2000 threshold
  • Planning ahead or transferring assets to a spouse to avoid triggering capital gains tax
  • Mitigating IHT liabilities using strategies such as gifting to family ahead of time, using investment vehicles that attract business relief or planning to use a pension as a vehicle to pass down wealth to family members in an IHT exempt fashion.

A silver lining ahead

What goes up, must come down, and economists are very clear that inflation cannot last forever. The Bank of England says it believes that inflation will be back on target at two per cent in two to three years’ time.

That’s cold comfort now as we absorb price rises, but something to consider.

In the nearer term, there will be some relief for many pay packets on July 6, when a change to the threshold at which we pay NI comes in. This will impact earners at all levels. While those earning above £40,000 or so will still pay more NI than they did in March this year, the amount will come down from the tax paid this month until July.

The next pay slip we receive may be a shock, with higher taxes to pay, while the money we receive will not go as far, but as we reach the end of what has become known as ‘Awful April’ due to tax and price rises, keeping a level head and making sensible choices about savings where we can will help our finances to keep going in the right direction.