The cost of living

The cost of living: How are the self-employed affected and what can be done to address it?

As you are no doubt aware, the cost of living is going up at the fastest rate in living memory. As a self-employed person, changes to your monthly spend can have a dramatic effect on your quality of living. Self-employed income can be sporadic, and so it is important to understand what costs are going up and what you can do to mitigate the changes.

What’s changing in April?

From April, a number of changes will potentially put a strain on household budgets. To compound the difficulties faced by an increase in the cost of living, interest rates are also rising from 0.5% to 0.75%.

There are four main aspects that are the main contributors to the rise in the cost of living, these are:

1. The energy price cap has risen

The energy price cap set by industry regulator Ofgem, is the maximum amount an energy supplier can charge you for gas and electricity if you are on their “default” tariff.

A default tariff can fluctuate according to changes in wholesale prices for energy.

The new annual cap in place from the beginning of April is £1,971 (up 54% on the previous level of £1,277). This could rise again by another £500 when reviewed in October.

The reason for this is predominantly because wholesale gas prices are currently at record highs as the world reopens its economies in the wake of Covid restrictions, thus pushing up the demand for fuel.

The government has attempted to address this sudden rise in energy costs by providing

around 28 million UK households with £200 off their domestic energy bills from October, applied automatically by energy suppliers.

Although the headline figure appears helpful, the £200 is actually a loan and will ultimately need to be repaid in £40 instalments over five years starting from 2023, which is when the government expects energy prices to fall.

2. A new Social Care levy

A new 1.25% health and social care levy, designed to boost funds for the NHS, will be added to national insurance bills from April. 

It means the self-employed will see their national insurance contributions rise from 9% to 10.25% and an additional 3.25% at the higher rate band from a previous 2%

However, from July 2022, the allowance level after which national insurance contributions are required is increasing. Currently set at £9,880 for self-employed, this will increase in line with the employed, to an allowance of £12,570 (which equates to the same figure you need to reach before paying income tax). It I thought that this measure will save workers an average of £330 a year.

3. Council tax is going up

Local authorities across Britain have the scope to increase council tax payments by up to 5%.

Any rises over this threshold have to be approved by a referendum first.

To offset this, households living in council tax bands A to D will receive a £150 council tax rebate from April. This will be applied automatically by local councils to your bill when it comes in April, so you don’t need to apply as long as you pay by direct debit.

For vulnerable people and those on low incomes that don’t pay council tax, the government has set aside additional discretionary funding for local authorities.

4. Changes and freezes to income tax

It is not just national insurance that is rising in April 2022. The same 1.25% health and social care levy will be added to the tax levied on people who get an income from dividends, which will have a particular effect on some of the self-employed who derive their income from dividends through a limited company.

Currently, you can earn £2,000 a year from dividends tax-free.  Above this, basic-rate taxpayers pay a rate of 7.5%, which will rise to 8.75% from April 6th. 

Those in the higher-rate band will pay 33.75% from April 6th, up from 32.5%, and additional-rate taxpayers will pay 39.35%, up from 38.1%. 

In addition, the personal income tax threshold will be frozen at £12,570 and the point at which you pay a higher rate of tax will be frozen at £50,270. So, if your income goes up, so do your taxes.

What can the self-employed do to address the increase in the cost of living?

Although there is not a lot you can do to avoid the rising costs on the way, there are some mitigations that you can put in place to help ease the burden.

Save money on energy bills

The surge in wholesale energy prices has seen a number of energy companies go out of business, offering less choice for the consumer. Unfortunately, this means that the previous route of swapping providers to get the best deal does not bear fruit. Many suppliers have withdrawn their fixed-rate deals, so it’s probably best to stick with your current provider. Other ways you can reduce your energy bills include:

  • Heat downstairs only
    If you live in a property with two or more levels, then turning the radiators off or down upstairs can reduce the amount of wasted energy. Heat rises, and so any warmth created downstairs will translate to upstairs rooms. Closing doors to the rooms that you are in can help retain the heat.
  • One-pot cooking
    Cook a meal such as a stew or casserole in the oven in one dish to save using multiple hobs and more dishes to clean.
  • Wrap up warm
    It may seem simple, but adding layers or wearing socks or slippers can help keep you warm before reaching for the heating controls.
  • Reduce the temperature for washing
    Wash your clothes at 30°C instead of 40 or 60°C.Clothes are washed just as effectively at these temperatures and could use about 40% less electricity over a year.
  • Warm home discount
    Those on lower incomes could get £140 off their electricity bill through the government’s warm home discount scheme. 

Help with childcare 

The government offers a tax free childcare scheme, which approximately 316,000 families currently use. However, 1.3 million families are thought to be eligible.

With tax-free childcare, parents get £2 for every £8 they spend on childcare – up to a total of £2,000 per child each year to help pay for the cost of a childminder, nanny, nursery or after-school club.

Most parents are eligible, but you cannot have an individual income of more than £100,000 a year.

Use a budgeting app

Many people are using technology to help manage their spending. There are a number of budgeting apps on the market, whereby you can link all your bank accounts and credit cards into one place, making it easier to manage your budget.

Other apps offer features where you can round up your spending to the nearest pound, with the remainder being placed in a separate savings account.

Sign up to a 0% interest credit card

Credit cards should not be used as a primary source of paying for items, but they can be useful to borrow money for purchases and the spread out repayments suited to your budget. Many credit cards offer 0% interest for up to 2 years, which could be beneficial if you wish to transfer any existing credit card debt.

Save on tax and increase benefits

There are legitimate ways to pay less tax without doing anything illegal. You can earn £1,000 from a side project in property or trading tax-free. 

You can also check out the benefits you may be entitled to – for example, child benefit and the marriage tax allowance.

Child benefit is paid at £21.15 a week for your first child, and £14 a week for an additional child. Parents can receive the benefit if both partners earn less than £60,000 a year, although the amount per child decreases on earnings above £50,000.

The marriage tax allowance lets you transfer up to £1,260 of your personal tax allowance to your spouse or civil partner. One partner must earn below £12,570 a year, and the other must be a basic-rate taxpayer to qualify. 

In times of nationwide financial pressures, being self-employed can be particularly challenging. Being prepared for a rise in your outgoings is important, as you don’t know whether the state of UK finances could have a knock-on effect on your business. The situation will improve eventually but it may be a tough ride over the next couple of years.


Source Credit: The Times, The Financial Times



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