Apart from the human cost, Covid has cost us all a great deal. In the first year of the pandemic the government borrowed £299bn, the highest figure since records began in 1946. Another £200bn will be needed this year, and as taxpayers, we will be paying for it all.

But the Covid costs don’t stop there. The low interest rates vital to restart the economy are also helping to restart inflation.

Covid and lockdown reduced economic activity, eliminating the inflationary pressures that were becoming a worry at the beginning of 2020. The cost of some goods fell early in the pandemic in response to a collapse in demand.

Now, as the economy starts to recover, pent-up demand and supply chain bottlenecks are creating severe price pressures and increasing the costs of goods and materials. For example, a global shortage in microchips has slowed the production of new cars, increasing demand for used cars, resulting in second-hand car prices increasing by 27.4% since April.

Inflation

The process of inflation began earlier in the year when figures were higher than expected and surpassed the 2% Bank of England target. However, the latest ONS data has shown that in October inflation surged to 4.2%, the highest rate for almost 10 years and is forecast to increase to around 5% by April 2022.

As well as increasing costs of goods and raw materials, substantial energy and fuel rises have also significantly effected inflation. In the last year gas and electricity bills increased by 28.1% and 18.1% respectively and a spike in global oil prices has seen petrol prices increase to their highest level since 2012.

According to the ONS, in 2019, a typical household spent just over £20,000. Current inflation rises would push up the bill for those same goods and services substantially.

To curb inflation, it is now widely expected that the Bank of England will increase current historic low interest rates in December.

National insurance and taxes are going up

National insurance contributions (NICs) paid by both employed and self-employed workers will rise by 1.25% in a bid to help fund health and social care costs. From 2023, the health and social care levy element will then be separated out and the exact amount employees pay will be visible on their pay slips. It will be paid by all working adults, including workers over the state pension age – unlike other NICs. This means an employed basic rate taxpayer earning £24,100 a year would contribute an extra £180, while a higher rate taxpayer earning the median higher rate taxpayer’s income of £67,100 a year would pay £715.

In the March Budget there were minor increases to the £12,500 and £50,000 income tax thresholds to £12,570 and £50,270 respectively but these are frozen until 2026. These thresholds usually rise with inflation, now they will not and as a result we could all be paying more tax over the next 5 years.

All these increases add up to increased pressure on family budgets. Wages are increasing but probably not by enough to compensate for the added costs and tax rises.

Now is a good time to take a fresh look at your financial plans to see if you may be able to make your money work harder for you and reduce the amount the taxman can take.

If you would like to discuss in more detail any of the issues raised in this article with a member of our team, please call 01772 741200