Think tank warns 2022 will be the year of ‘cost-of-living catastrophe’ set to hit millions of households

The new year will be bleak for Brits including those in Sheffield, as millions of families face a 'cost-of-living catastrophe'.
Watch more of our videos on Shots! 
and live on Freeview channel 276
Visit Shots! now

That’s according to analysis by a think tank, which has warned about the impact of rising taxes, energy expenses and inflation.

The Resolution Foundation forecasts that spring 2022 will be particularly challenging, as the crisis will affect the great majority of households.

Hide Ad
Hide Ad

Rising energy bills and hefty tax increases will result in an annual income loss of almost £1,000 for the typical household, it says.

The Resolution Foundation forecasts that Spring 2022 will be particularly challenging, as the crisis will affect the great majority of households.The Resolution Foundation forecasts that Spring 2022 will be particularly challenging, as the crisis will affect the great majority of households.
The Resolution Foundation forecasts that Spring 2022 will be particularly challenging, as the crisis will affect the great majority of households.

The research stated that the frightening outlook is 'so large and widespread' that it is almost impossible for it to proceed without some type of mitigation from the Government.

The report, which was released on December 29, said the Government's New Year resolutions should be addressing the increase in the energy price cap that will see gas and electricity bills taking up 12 per cent of lower-income households’ spending, which is up from 8.5 per cent last year.

The RF said that based on current trends, this time next year it is likely to be looking back on a 2022 defined more by a cost of living crunch than the Omicron wave that will dominate the beginning of the year.

Hide Ad
Hide Ad

The think tank cautioned that increases in National Insurance Contributions (NICs) are occurring 'at exactly the same time as a new coronavirus wave, falling real wages, and massive energy price rises’.

At the same time, increasing inflation is expected to reach a 30-year high of six per cent, leaving real earnings unchanged and no higher than they are this year at Christmas.

Read More
Council tax Sheffield: How much your bills could rise by and when it could happe...

What are the changes to taxes?

The report warned that there will be huge tax increases in April. In addition to the regular council tax increase, the VAT rate for hospitality and accommodation is slated to return to the standard 20 per cent rate on April 1, and dividend tax rates are set to increase as well.

The biggest change will be a 1.25 percentage point increase in National Insurance (NI) rates (as a precursor to the proper Health and Social Care Levy which will exist from 2023).

Hide Ad
Hide Ad

The regular inflationary increase in the beginning point for NI will slightly counteract this for the lowest earners. However, April also marks the start of a four-year income tax threshold freeze, effectively yet another tax increase – albeit one that is not accompanied by a financial loss month to month.

The NI and income tax changes are both significant, though the former is more substantial. The average overall impact on household incomes is £600, or 1.4 percent of disposable income, across all households.

Unlike the impact of increased energy prices, however, these losses are disproportionately borne by higher-income individuals.

For example, the NI rate increase (without the impact of the threshold increase) will reduce average household income by roughly £140 (0.6 per cent) in the bottom half of the distribution, while those in the top half will lose £730 (1.2 per cent).

Will my energy bills be affected?

Hide Ad
Hide Ad

Energy prices are expected to be a major source of inflation in 2022, according to the Bank of England.

The report said over the last year, wholesale spot gas and electricity prices have grown by more than eight and five times, respectively.

The main effect to date (as of December 22) has been the failure of 28 energy suppliers, but households are next in line, as higher wholesale prices will feed through to a very large increase in the energy price cap in April, amounting to a rise of around £500 for a typical household bill, on top of the £139 increase in October.

As the expenses associated with those corporate failures are recouped, households will incur an additional penalty of roughly £100.

Hide Ad
Hide Ad

The RF also said £600 is a significant increase for households of all income levels, but it will be felt most acutely by lower-income families: households in the lowest income decile will see their energy spending rise from 8.5 to 12 percent of their total household budget – three times that of those in the top decile.

Many people switching from fixed to price-capped contracts will see much higher increases.

Will there be any changes to my council tax?

As councils scurry to plug budget black holes, people will face a council tax hike of at least three per cent in April.

In Sheffield, it has been warned that council tax could rise by up to five per cent a year for the next three years.

Hide Ad
Hide Ad

Most councils in charge of social care will be able to increase their bills by at least 3 per cent - 1 per cent for care and two per cent for general finances.

The average Band D council tax charge is currently £1,898 per year, up from £1,439 in 2010/11. A 3 per cent increase would add £57 to the bill.

Individual council tax bills will be decided in February or March next year.

What does the report advise?

The report said the Government’s new year’s top resolutions should be addressing the increase in the energy price cap that will be felt very keenly by low-income households, and especially by out-of-work households whose income has already been cut back by £1,000 this autumn when the £20/week uplift to Universal Credit was removed.

Hide Ad
Hide Ad

“Of course, the longer-term answers to insulate ourselves better from volatile commodity markets are to accelerate the rollout of renewable energy, and crack on with long-overdue reform of the power system architecture to accommodate more variable generation sources at low cost,8 and to insulate the nation’s homes," it states.

"But households feeling the squeeze today will be looking for more immediate action.”

To read the full report, click here.