National Insurance rates rise and Income Tax thresholds frozen

National Insurance rates rose and Income Tax thresholds were frozen in April 2022, changes the Resolution Foundation said would combine with high inflation to squeeze household incomes. In its Living Standards Outlook 2022, published on 8 March 2022, the foundation said "National Insurance rates will rise, while higher inflation means the freeze in Income Tax thresholds will represent a bigger tax rise than originally planned"¹.

The same report set out how far prices had already risen. Inflation stood at 0.7 per cent in January 2021 and was 5.5 per cent at the time of writing, its highest rate in 30 years, and was projected before Russia invaded Ukraine to hit 7.3 per cent in April 2022¹. The foundation estimated the monthly peak would exceed 8 per cent that spring, and said prices in 2022-23 would on average be 7.6 per cent higher than in 2021-22, up from the Bank of England's February forecast of 6.2 per cent¹.

The foundation described the effect of the tax changes across the income distribution. It said the squeeze would be felt across the distribution, and that the tax changes were progressive: households in the second-highest income vingtile would lose 1.8 per cent of their disposable incomes, compared with 0.4 per cent for households in the second-poorest vingtile¹.

Energy bills formed the other half of the April squeeze. The foundation said a typical energy bill would rise by £693, or 54 per cent, in April 2022, after a £139 rise in October 2021, and that October 2022 could see a further rise of around 47 per cent, equivalent to around £900 a year for a typical household¹. It noted the £150 Council Tax rebate for those in Bands A to D, with Scotland and Wales introducing similar policies, and a £200 temporary rebate on all electricity bills in autumn 2022, saying the package meant a £350 boost to most households' incomes in 2022-23 but a £40 drag from 2023-24 as the Energy Bills Rebate is clawed back over the following five years¹.

Benefits were uprated by 3.1 per cent in April 2022, including the State Pension, at a time when the cost of living could be rising by more than 8 per cent, the foundation said, adding that over 2022-23 the value of most benefits may fall by 4.2 per cent in real terms¹. It said this was equivalent to a one-off £10 billion cut to benefit spending in 2022-23 and would take the core level of support in the benefit system to its lowest level in real terms since 1983-84¹. For those on Tax Credits and most on Universal Credit, it said, this came after the £20 a week cut to benefits in October 2021 when temporary pandemic support ended¹.

Why it matters for households

The changes took effect in April 2022 and apply to employees, the self-employed and employers paying National Insurance, and to anyone whose Income Tax bill depends on where their income falls against frozen thresholds. Because thresholds were held rather than raised in line with inflation, more of a pay rise moves into tax than would otherwise be the case, and the foundation's point is that higher inflation made that effect larger than originally planned¹.

At the same time, the value of most benefits rose by 3.1 per cent in April 2022 while the cost of living could be rising by more than 8 per cent, so the real value of that support fell over 2022-23 on the foundation's estimate¹. Households also faced a £693 rise in a typical energy bill in April 2022, with a further rise of around 47 per cent possible in October 2022¹. The £150 Council Tax rebate and £200 electricity rebate added £350 to most households' incomes in 2022-23, but the foundation said the electricity rebate is clawed back over five years, turning into a £40 drag from 2023-24¹.

The foundation also set out housing costs: social rents in England could rise by up to 4.1 per cent in April 2022 and perhaps over 8 per cent in April 2023, and 44 per cent of social renters do not receive housing support¹. On mortgages, it said two rises had taken the Bank Rate to 0.5 per cent in February 2022, and it used a February market expectation of rate rises peaking at 1.3 per cent in the first quarter of 2023¹.

What happens next

The foundation said the real cut in benefit values in 2022-23 was set to be largely undone in April 2023, when benefits could rise by 7 per cent or more, which would be the largest permanent nominal increase for most benefits since 1991-92¹. It said the energy price cap was expected to rise again in October 2022 even before the conflict in Ukraine began¹. The report's projections pre-date the Spring Statement of 23 March 2022, and it points readers to separate work incorporating the policies and Office for Budget Responsibility forecasts set out that day¹.