November’s inflation figures may have given a glimmer of hope that the cost-of-living crisis is receding, but the UK is entering 2023 with a bundle of challenges.
Interest rates and inflation are at their highest levels in decades and changes to retirement ages could disrupt life plans.
Here, analysts at Hargreaves Lansdown explain what they’re expecting to happen in 2023 and what it means for your personal finances.
Higher taxes
People in the UK will feel the pinch of higher taxes next year, according to Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
She said that chancellor Jeremy Hunt’s move to shrink income tax thresholds in November’s Autumn Statement will “push enormous numbers of people into higher tax bands”.
The threshold will be lowered from £150,000 to £125,140 in April next year, capturing a broad net of taxpayers off guard.
Coles said: “These kinds of stealth taxes tend to slip under the radar but can have a much bigger impact than a tax hike.
“When you add in higher council tax and the frozen inheritance tax bands, we’re being stung for more tax on all sides.”
Changes to pensions
The income tax threshold cut will also coincide with the return of the pension triple lock in April.
Those saving for retirement will be relieved to hear that the policy (which pledges to increase the state pension in line with inflation) will return after being suspended last year.
Although Hunt brought it back in last month’s Autumn Statement, the triple lock’s homecoming may not be that long lasting, according to Helen Morrissey, senior retirement analyst at Hargreaves Lansdown.
She said: “It remains a divisive policy with many believing it is unfair to younger generations and the spiralling cost of providing the state pension will continue to stoke debate as to the triple lock’s long-term future.”
Indeed, the government may also announce changes to the retirement age next year which “would cause dismay among many older workers”.
It currently stands at 66, with plans to raise it to 67 by 2028, but a review due to be published in January may accelerate the retirement age to 68 by 2033, spoiling retirement plans for those planning ahead.
“The author [of the report] needs to weigh up managing the eye-watering costs of providing the state pension against the fact that the rapid increase in longevity is slowing and many people simply can’t keep working that long,” Morrissey added.
Persistently high energy bills and inflation
The 0.4 percentage point dip in UK inflation last month may be a positive sign that costs hikes are easing, but UK consumers have a lot more pain ahead, according to Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
She said: “There is still the potential for plenty of pain ahead, as stubbornly high prices continue to cause severe headaches for the economy.”
The Monetary Policy Committee upped interest rates to 3.5% at its most recent meeting, but the biggest drivers of inflation are outside of the central bank’s control.
Streeter said that “there are no guarantees” that the Bank of England (BoE) will meet its goal of reducing inflation to 5% by the end of next year because the energy costs are uncontrollable.
Continued conflict in Ukraine keeps oil and gas prices in a volatile position and the average UK household is expected to pay an additional £3,000 in bills despite the energy price guarantee.
The guarantee is certainly better than nothing, but Coles said that “average earners know we’ll be getting less help with more expensive bills”.
Lower savings rates
Inflation may well be on the way down, but that could spell bad news for savers looking for an attractive rate.
Lower inflation expectations means that many of the most lucrative rate offers may have passed, but savers could still find two-year fixed rates that could beat inflation.
Coles said: “Those lower rate expectations have already seen some of the most competitive fixed rate savings deals pulled, so we’re likely to see these ease off as we head further into 2023.”
A fall in mortgage interest rates
Lower inflation rate expectations also come with an upside for investors looking to buy property soon.
If the cost-of-living is indeed on the way down, the BoE may lower interest rates meaning a subsequent drop in mortgage interest rates could be imminent.
Coles said: “These lower-than-expected forecasts are already feeding through into lower fixed rate mortgages, and we’re likely to see those come down further.”