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Highlights
- Chancellor Rishi Sunak gave his recent budget speech addressing the concerns related to rising cost of living.
- The universal credit taper rate has been cut; the national living wage will rise to £9.50.
- The budget announcements may be advantageous for the lower income households.
Amid rising inflation and increasing pressure on the finances of households, Chancellor of the Exchequer Rishi Sunak in his recent budget speech addressed the concerns related to rising cost of living. Sunak announced his plans for a new post-covid economy while acknowledging that the pandemic is still not over, and the upcoming months may be challenging.
However, households are still wondering about the impact of these announcements on their personal finances.
Currently, inflation is at 3.1%, which is way above the 2% target of Bank of England. It is expected to further rise to 4% next year as per OBR estimates. But the rabbit was pulled out of the hat by adjusting the Universal credit’s taper rate, which will positively affect the lower income households as they will be able to retain a greater share of their earnings.
Other breathers are the national living wage will rise to £9.50, air passenger duty on flights within the UK has gone down, and fuel and alcohol duties have been frozen.
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Let’s briefly understand how these developments may affect the personal finances of households and what steps should have been taken by the Government to ease their financial stress.
RELATED READ: Autumn Budget 2021: Top 10 highlights to note
Impact on personal finance
The increase in the national living wage to £9.50 from £8.91 per hour appears to be a generous move but its unknown if it will actually help in reducing the financial hardship of households.
An amount of £1,073.80 will be added to the annual earnings of workers who work 35 hours a week. But due to increased National Insurance contributions by 1.25% from April 2022 and an anticipated tax hike, it might appear like giving with one hand, and taking away with the other, as per Michael Carty from XpertHR.
The tax bill of a basic-rate taxpayer earning £24,100 will increase by £180 due to increased NI contributions, as per Hargreaves Lansdown.
The universal credit taper rate being cut down to 55% from 64% and 55p of universal credit would be taken out of every extra £1 earned by a worker. In addition to a £500 hike in work allowance, more than £2 billion may be saved by around 1.9 million people, as per Hargreaves Lansdown. This will definitely be advantageous for the lower income households, but it may not be enough for them to help them deal with the rising inflation levels and a rough winter ahead of them.
The households who were worried about falling into the fuel poverty trap due to soaring energy prices haven’t been supported with any announcement related to removal of VAT on bills. The Government could have reduced the financial anxiety of households by even a small VAT cut to household energy bills, but it didn’t do so, further increasing the financial burden of households. With more and more energy suppliers going bust and rising energy bills, households are approaching towards a rough winter where they will be forced to choose between necessities like cooking and staying warm.
RELATED READ: Autumn Budget 2021: Which lenders can benefit from £4-bn city tax cut?
Even though freezing of fuel tax is a relief for motorists, it won’t help much given the record high pump prices. The Government could prevent hurting the household budget by temporarily cutting VAT, but it didn’t, that too at a time when it was needed the most.
A planned rise in alcohol duties has been cancelled yet again. Additionally, an overhaul of the alcohol duty system has been announced, which will reduce its complexity by bring down the number of duty rates from 15 to just 6. This will lead to an increase in the cost of strong ciders and fortified wines. In contrast, champagne, fruit ciders, and lower strength beers will see a fall in price.
A £500 million plan was announced in the Budget to help the parents and children in England, of which £200 million would be dedicated to help families with complex issues. However, pensioners were not benefited with any announcements related to a hike in social security payments, like the warm homes discount, winter fuel payment, or cold weather payment, thus increasing financial anxiety among older people.
This comes as a big blow after the triple lock was removed by the Government, leading to lower-than-expected state pension payments. This will lead to complexities in retirement planning and increase the potential of scam activities.
RELATED READ: Autumn Budget: Top 10 expectations from Sunak
Bottom line
According to a leading think tank, the Resolution Foundation, there has been a £3,000 increase in the tax bills for households since Boris Johnson became the PM, based on the recent budget changes. The budget has a huge impact on the personal finances of households, especially the lower income households, as every pound they save is quite valuable for the households.
