Tax crisis: Families face ‘year of the squeeze’ in £1,200 tax and energy hit | City & Business | Finance


The main blow will come in April when the energy price cap is set to rise with predictions it may go as high as £2,000. According to think tank the Resolution Foundation this will mean typical energy bills rising at least £500 a year per household along with an additional £100 charge as the costs of dealing with failed suppliers are recouped. Low income families will be hardest hit by rising energy bills with the Resolution Foundation’s Labour Market Outlook report forecasting the poorest households will be left spending 12 percent of their income on energy compared to 8.5 percent currently. Factors such as larger families, outdated boilers and poorly-insulated properties mean many poorer households could find costs rising £750 or more in April.

Currently higher numbers than normal are on standard variable tariffs due to a lack of fixed tariffs this year and customers being moved from failed suppliers.

As a result changes to the price cap will affect more people far more quickly than in the past with the Foundation warning: “Proceeding with such a large, overnight bill rise without mitigating measures at a time when real wages are likely to be falling looks completely untenable.”

Also in April the freeze to income tax thresholds and a 1.25 percent increase in National Insurance contributions is expected to add around £600 to household costs.

For families in the top half of the income distribution the rise in National Insurance will raise tax bills £730 on average.

Highlighting the impact of the pandemic it suggests by 2024 real wages will be £740 lower than if pre-pandemic growth had continued.

Chief Executive of the Resolution Foundation Torsten Bell, said: “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.

“The peak of the squeeze will be in April, as families face a £1,200 income hit from soaring energy bills and tax rises.

“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.”

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The Foundation suggest a number of measures the Government could employ to tackle spiralling energy bills.

One idea is reducing the size of the energy price cap which would mean needing to compensate energy suppliers.

This is estimated to cost around £2.7bn if the cap was reduced by £200, or £450m if this was targeted at households on Universal Credit.

Currently a £100 component of April’s bill rise is recouping the cost of failed energy suppliers so another proposal is to spread these payments out over a longer period of time.

Other ideas are extending and increasing the Warm Homes Discount and moving environmental and social levies applied to electricity bills into general taxation.

There have also been calls to cut or remove VAT on energy bills however the Resolution Foundation notes this would run against Government net zero ambitions.

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