Families could face financial ‘catastrophe’ with £1,200 hit to income
UK households face a financial hit next year as stalling wages and rising tax and energy bills cause a "cost of living catastrophe" in the spring, an economic think tank has warned.
The Resolution Foundation (RF) has said from next April, families may face a £1,200 a year hit to their incomes as government measures such as the 1.25% increase in National Insurance (NI) contributions and freezing personal income tax allowance will combine with high inflation, tax changes and the cap on energy bills.
The RF is calling 2022, the "year of the squeeze".
How are bills changing?
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The gas and electricity crisis will also deal with a £25 billion hit to consumers, warn suppliers, as household bills could rise to £2,000.
Kwasi Kwarteng, the Business Secretary, held emergency talks with suppliers, where the Treasury and Number 10 officials were also present on the zoom call.
Stephen Fitzpatrick, the founder of Ovo Energy, said Britain is heading towards a massive cost of living disaster.
He said: "It looks almost certain that bills are going to reach £2,000 per household - that is double what they were paying last year."
UK inflation hit a 10 year high in November, and it has been suggested that it will rise further in 2022, partly due to energy bills which have been driven up by rising wholesale gas prices.
The energy price cap limits how much a company can charge but the cap is suggested to soar again in April 2022, after being reviewed in February.
The cap on energy bills is expected to rise by around £500 a year. Coupled with a further £100 rise to recoup the costs associated with energy firm failures, this could mean a typical energy bill rising by around £600 a year.
The think tank said the increase in the price cap in April would have the biggest impact on low-income households as they will spend more of their income on energy. The poorest households would see spending on gas and electricity rise from 8.5% to 12% of their earnings.
The RF said the freeze of personal tax allowance at £12,570 a year and the 12.5% increase in personal NIC's would cost the average household £600 a year.
For families in the top 50% of earners, the NI rise will add an average of £750 annually.
Real wages had "almost certainly" started to fall, according to the RF, and will not pick up again until the final three months of 2022, meaning real living wage is just 0.1% higher than it was at the start of the year.
It is expected by the end of 2024, real wages would be £740 a year lower than if the UK's pre-pandemic pay growth had continued.
What has been said?
Chief executive of RF, Torsten Bell, said: “2022 will begin with Omicron at the forefront of everyone’s minds. But while the economic impact of this new wave is uncertain, it should at least be short-lived. Instead, 2022 will be defined as the ‘year of the squeeze’.
“The overall picture is likely to be one of prices surging and pay packets stagnating. In fact, real wages have already started falling, and are set to go into next Christmas barely higher than they are now.”
Regarding the £1,200 income hit in April, he said “So large is this overnight cost of living catastrophe that it’s hard to see how the government avoids stepping in.
“Top of the government’s new year resolutions should be addressing April’s energy bills hike, particularly for the poorest households, who will be hardest hit by rising gas and electricity bills.”