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Can Rishi Sunak rescue the UK from a cost of living crisis?

·Finance Reporter, Yahoo Finance UK
·6-min read
British Chancellor of the Exchequer Rishi Sunak speaks at Conservative Party Spring Conference in Blackpool, Britain March 18, 2022. REUTERS/Phil Noble
Chancellor Rishi Sunak is likely to find himself under pressure to alleviate the looming cost of living crisis. Photo: Phil Noble/Reuters

With rising inflation and soaring energy bills squeezing families, the chancellor is under pressure to ease the burden on UK households.

Rishi Sunak said he would help families struggling with the cost of living when he gives his spring statement on Wednesday, saying: “Where we can make a difference, of course we will.”

The chancellor added that his priority was to cut taxes over the rest of the parliament, after analysis showed he had raised taxes more in two years than Gordon Brown, former Labour chancellor, did in a decade. But he refused to say whether he would cut income tax or change the threshold for the payment of national insurance in the spring statement,

There are hopes the chancellor could cut the cost of fuel and energy bills while cutting taxes and boosting benefits.

Read more: Sunak to have extra £6bn to help ease UK’s cost of living crisis

Although plans are still being finalised, here is what to expect from the spring statement to help ease the UK’s cost of living crisis.

Cut in fuel duty

Sunak has hinted at a cut in fuel duty, perhaps of 5p, after Russia’s invasion of Ukraine sent the cost of fuel at the pumps soaring.

The measure is expected to be temporary while oil prices are abnormally high.

Figures from data firm Experian Catalist show the average cost of a litre of petrol in the UK on Sunday was 163.5p, while diesel was 173.4p

Sunak said on BBC’s Sunday Morning: "Obviously I can't comment on specific things. But what I would say, I understand that, I have a rural constituency, people are incredibly reliant on their cars and this is one of the biggest bills that people face, watching it go up, right, we're all seeing that, when we're filling up our cars. I get that."

Read more: Spring statement: How will fuel duty cut impact UK petrol and diesel prices?

Torsten Bell, the director of the Resolution Foundation thinktank, said he believed a 5p cut in fuel duty was now highly likely. “That works in terms of Tory politics. It is not the best policy in the world but politically it is well targeted,” he said.

Shadow chancellor Rachel Reeves said households needed more than 5p to tackle the spiralling cost crisis. “Even a 5p reduction in fuel duty will only reduce filling up the car with petrol by £2. So, I don't think that really rises to the scale of the challenge," she said.

National insurance hike mitigated

National insurance is due to go up by 1.25 percentage points to 13.25% in April, a hike to pay for social care. It will add £342 to the annual tax bill of the average worker.

Calls to scrap the planned new tax are supported by many in both the Conservative and Labour parties.

Sunak has insisted that the national insurance rise will not be cancelled, but it could be mitigated.

It is thought ministers are considering plans to wipe out the national insurance tax rise for low earners by raising the threshold above which it is paid.

The threshold is set to increase to £9,880 a year — up from the £9,568 a year now.

The national insurance threshold is rising by only 3.1% despite inflation running at 5.5%.

Read more: Bank of England raises UK interest rates to pre-pandemic levels

The failure to raise the threshold by inflation is a "stealth tax" that is costing UK workers an extra £45 a year, says research.

The Lib Dems have said between 95,000 and 125,000 fewer people would have to pay national insurance if the threshold rose by 7.25% instead. This would mean workers would only start paying national insurance on income over £10,285.

Alternatively, Sunak could delay the introduction of the increase.

There was speculation at the weekend that officials have been studying similar changes to income tax thresholds and allowances.

The income tax personal allowance and 40% rate threshold will freeze at £12,570 and £50,270.

The IFS think tank warned the threshold freezes will lead to more than £20bn in “stealth” taxes as inflation spikes.

Changes to universal credit and child benefit

Similar to the national insurance threshold, while inflation is heading for 8%, the current benefits increase is just 3.1% in April. Government officials have suggested an increase in benefits closer to inflation figures or a reversal of the removal of the £20 a week uplift.

“For people on universal credit, we’ve taken an approach to help make sure their work is rewarded and, of course, I want to make sure that we’re helping people who are most vulnerable,” Sunak has said.

Child benefit “may also be in line for a shake-up”, according to Which?

“The threshold for the high-income child benefit charge hasn’t increased with income tax band thresholds, meaning some basic-rate taxpayers will be forced to repay some of their child benefit payment if they earn more than £50,000,” said Which?

Changes to child benefit “would help some household budgets”.

VAT reduction

The chancellor is also believed to be looking at whether to extend the current VAT discount for hospitality businesses, originally implemented to help the sector recover from the pandemic.

VAT for pubs, restaurants and concert tickets is currently 12.5%, but it is due to revert to the regular 20% rate next month.

More help with the energy bills

Despite the government unveiling a £150 council tax rebate and a £200 energy bill loan, experts have argued these measures do not go far enough to help households amid spiralling costs.

It is believed that the £200 credit could be raised as natural gas prices are expected to rise further due to sanctions imposed on Russia from western nations. The statement could also bring increases to the £150 council tax rebate being handed to Band A to D homes next month.

Another option is delaying the repayment schedule, or exempting poorer households from paying back all the cash.

Read more: Triple lock freeze to cost pensioners £500 a year, says TUC

Under current plans the repayment would start from April 2023 at £40 a year.

Adrian Lowery, personal finance expert at Bestinvest, said: "There is a rising expectation for some sort of measure to help especially less well-off households to cope with living costs, and particularly energy and fuel prices, that are soaring and threatening to depress living standards.”

Sunak also warned Britons that “it’s not going to be easy”, by saying: “I wish government could solve absolutely every problem, that I could fully protect people against all the challenges that lie ahead. I can’t do that."

Chancellor Sunak will deliver his spring statement on Wednesday.

Watch: How does inflation affect interest rates?