Tax and energy bill rises will leave average household £672 per year worse off from April

Costs are set to rise in what is expected to be a tough April, reports ITV News Economics Editor Joel Hills

This coming April will be a particularly cruel month.Not only is the government’s energy price cap set to rise again, and with it energy bills, but in April, the chancellor’s planned tax increases are also set to bite.The national minimum wage will rise significantly from April 1 and cash benefits and the state pension will be made more generous from April 11, but new analysis suggests that these measures will not be enough to prevent households feeling much worse off.

The Tony Blair Institute for Global Change calculates that, unless the government does more to cushion the impact, the average working-age household in the UK is set to see their disposable income fall by £56 a month.

For 90% of UK households this represents a 1-2% fall in their post-tax income.

But the poorest 10% of households will be hit substantially harder with a larger proportion of their income disappearing almost overnight.

“For people in the upper-half of income distribution, the better paid, this will feel like a manageable shock, it’s not life-changing. But for people in the bottom half this is a very significant amount of money,” says Ian Mulheirn, the organisation’s chief economist.

“Lower income pensioners are badly hit but the worst hit tend to be families without children who don’t have much support from state and therefore are very exposed to these shocks," he adds.

"We think their net income ‘hit’ will be around 6% in April.”Last September, when the chancellor announced plans to raise national insurance contributions by 1.25% for employers and employees, the outlook was encouraging. The economy was growing strongly again, inflation was low and wages were growing. The tax increase was delayed until April 7 and designed to raise £14 billion to pay for reform to the care sector and help the NHS recover after the pandemic.

But since the Health and Social Care Levy was announced, paying for it has become more challenging as household budgets have become stretched.

A surge in the price of energy in particular has forced the headline rate of inflation above 5%, eroding living standards 

Ian Mulheirn, the chief economist for The Tony Blair Institute for Global Change, explains why families without children "will be the worst hit"

And the squeeze is set to intensify. 

The market price of gas is three-times higher than it was last summer. Cornwall Insight predicts that next month, Ofgem will set the energy price cap at a level which will mean the average household energy bill will jump from the current level of £1,300 per year to £1,900 per year from April. 

The scale of the hit to the livelihoods of those on the lowest incomes is stark.

“I don’t think people realise what is coming down the track,” says Mulheirn.

“There has been lots of talk about rising wholesale [energy] prices but it hasn’t affected consumers because of the energy price cap so far.” 

He adds: “I don’t think the government can realistically get away with doing nothing more to ameliorate the impacts of this price jump in April. The scale is just too big”.

The government is considering a range of policy responses to protect the most vulnerable, including channeling money to those who need it via the Warm Homes Discount or Universal Credit. 

"The scale is just too big" Mr Mulheirn says the government cannot get away with doing nothing more to ease the impact of the price jump from April

Labour wants Boris Johnson to deliver on a pledge to cut the 5% VAT on domestic fuel which he made before the referendum on membership of the EU. It is also pushing for a windfall tax on energy companies.

Gas and electricity suppliers, alive to problems they will face collecting money from people who fall behind on their repayments and the anger this will generate, want the government to move the green levies which subsides renewable power from household bills and into general taxation.

The Tony Blair Institute estimates that doing so would save households around £185 per year but at taxpayers expense.

And that’s the big problem here. The price of gas and electric has become significantly more expensive in the last 12 months and someone will have to pay for it. 

The burden either falls on consumers as they are now or on consumers in the future (the government is considering underwriting loans to suppliers to tide them over) or on the taxpayer. Or a combination of the three.

In a statement, a government spokesperson said: “We know people are facing pressure with the cost of living - which is why we’re taking £4.2 billion of decisive action to help.”

 “Our support includes reducing the universal credit taper - a tax cut worth over £2 billion -  supporting households with their bills through the Energy Price Cap, Warm Home Discount Scheme, Winter Fuel Payments, Cold Weather Payments, and Household Support Fund, as well as freezing alcohol and fuel duty.”