Why is the cost of living rising?
A cost of living crisis occurs when the cost of basic necessities such as groceries and bills rises faster than the average household income. The cost of living is directly related to the country’s inflation rate, which reached 9% this June. This means that, for example, if one litre of milk used to cost £1 a year ago, it now costs £1,09. Low rates of inflation may go unnoticed at first, but they can have a significant impact on how much you can buy with your money, often resulting in the rising cost of living.
Some of the reasons why this is happening include:
- As Covid restrictions ease, consumers spend more. However, many firms don't have enough goods to sell and satisfy the demand. This pushes up the prices of these goods.
- End of pandemic payments, such as the Furlough scheme, meaning people and businesses are struggling without extra government support.
- Shortage of certain products due to Brexit and the Russia-Ukraine conflict. There have been reduced imports for products like cooking oil and plastic, which are very limited, thus becoming very expensive.
- High demand and lower supply of gas and oil. Although the UK is not overly dependent on the Russian gas supply, the price is determined by the international markets, meaning any changes are reflected in UK energy prices as well.
- Businesses are struggling to recruit drivers and hospitality staff. This is partly due to the pandemic but hasn’t been helped by Brexit.
How has the Government reacted?
In response to the rising cost of living for households across the UK, the government has introduced a £15 billion support package, part-funded by a windfall tax on energy suppliers. The package consists of the one-off energy grant, paid to all energy bill payers, and cost of living payments, to support those receiving benefits. Read about all the support available below.
One-off energy grant
In order to help people cope with the rising energy prices, the government will give households a one-off £400 grant to help with their energy bills in October 2022.
All households in England, Wales and Scotland that pay for their energy and are connected to the electricity mains are eligible for this grant, regardless of their income. Customers with pre-payment meters will have the money applied to their meter or paid with a voucher, while direct-debit and credit customers will have the money credited to their accounts. You don’t need to apply for the one-off energy grant and don’t need to repay it.
One group of energy customers who may be left out are those whose energy bill is included in their rent, as the money would be paid to the landlord, and it is up to them whether to pass it on to the tenants or not. Consultations are still ongoing about how the rebate would be managed in such cases, and guidance should come in the summer.
Another group of customers who will not receive the grant are those not connected to the electricity mains. There are about 2000 households across the UK that are estimated to be off the electricity grid.
Council tax rebate
The council tax rebate is the government's targeted response to support those struggling to pay their council tax bills. A £150 tax rebate is available to all homes in council tax bands A-D. As a result, the majority of people, especially those with the lowest incomes, won't see an increase in their council tax costs. You will receive an email from your local council on how to claim it or if you pay by direct debit, the rebate will be automatically added to your account. Watch out for the rebate as a separate payment, not as a part of your council tax bill. The payment will be made from April 2022 and will not need to be paid back. To check what council tax band you're in, please click below.
Council tax bands
Cost of living payments
Cost of living payments are a form of financial support granted by the UK government to certain groups of people that already receive benefits or tax credits. In order to qualify for the cost of living payments, you need to be receiving one of the following:
- Pension Credit
- Income Support
- Income-based Jobseeker's Allowance
- Income-related Employment and Support Allowance
- Universal Credit
- Child Tax Credit
- Working Tax Credit
You do not have to apply for these payments - they are applied automatically and are paid to you in the same way you usually receive your benefits. This will be on top of the £400 energy discount paid to nearly all households in October. If you qualify, you will receive £650 paid to you in two instalments, one taking place in July 2022 and the other in autumn.
Cold Weather Payments
If the average temperature in your area is recorded as zero degrees celsius or below for seven days in a row, you will get £25 for each 7 day period between 1 November and 31 March. These payments are only available to certain groups of people already receiving the following benefits:
- Pension Credit
- Income Support
- Income-based Jobseeker's Allowance
- Income-related Employment and Support Allowance
- Universal Credit
- Support for Mortgage Interest
For more information on whether you're eligible for cold weather payments, visit the government website.
Warm Home Discount Scheme
The Warm Home Discount is a one-off payment to reduce energy bills over the winter months. The scheme is funded by participating energy suppliers. This winter, it’s rising from £140 to £150 and will be paid between October 2022 and March 2023.
The Warm Home Discount is split into two eligibility groups: the core group and the broader group. The core group consists of those receiving the Guarantee Credit portion of Pension Credit. To people in this group, the discount is applied automatically and you should receive a letter from The Department of Work and Pensions (DWP) in October 2022, to confirm if you're entitled to the discount.
The broader group consists of people on low income, who receive certain means-tested benefits and for this group, electricity suppliers choose who gets the discount. If you are a part of the broader group, you will need to apply on your supplier’s website and provide a declaration that you meet eligibility criteria. The application window opens around October and it’s best to apply as soon as possible, as the number of discounts your supplier can give is limited and is usually paid on the first come first serve basis.
Check with your electricity supplier when to apply and whether you’re eligible. Getting a Warm Home Discount doesn’t affect your entitlement to other payments.
Dealing with energy and gas price increases
Gas and electric prices are one of the key drivers of inflation in the United Kingdom, and they remain one of the basics that we can't live without. Due to a lack of more affordable options, the majority of households are currently on variable tariffs that are capped by the Ofgem price cap. Reducing your energy bill is one of the most challenging, yet effective ways to tackle the rising costs of living.
Watch your energy consumption
Savings: £150-£200 a year
Knowing exactly how much you are spending is the first step in managing your finances. Getting a smart meter is a great solution, as it automatically sends readings to your energy supplier, meaning you get more accurate energy charges without estimates. It also shows how much you spend in real time, allowing you to control your energy consumption.
Smart meters are free and if you don’t already have one, contact your energy provider about having one installed. The government is aiming to have smart meters installed in 85% of UK households by 2024, but the progress has slowed due to the pandemic. Some energy tariffs now require you to have a smart meter, so it's a good idea to get one fitted.
Some useful tips:
- Set your thermostat to the lowest comfortable temperature. According to the Energy Saving Trust, there is a 10% increase in your heating bill for every degree you turn the thermostat up, so keep it as low as you can. Turning it down by just 1°C can save you £100 a year.
- Be aware of the most power-hungry appliances. Televisions, especially with larger screens, consume a lot of energy, regardless of their energy rating. Try not to leave it on at night and switch it off when you’re finished using it.
Insulate your loft
Savings: £135-£315 each year
It is estimated around 25% of the heat that is lost from our homes heads out through the roof. Insulating your loft will ensure more heat is retained during the winter months and will allow you to save on your heating bills in the long term. It is also one of the most cost-effective solutions for achieving a well insulated home, as it will usually pay back in the first year or so.
If you receive benefits, you can apply for the ECO scheme, to receive support for your energy improvements (including loft insulation). This means that your energy company may offer to fit the improvement(s) for free or give you a discounted price. You can read more about the ECO scheme here.
Try washing your clothes at a lower temperature
Difficulty: Easy, but does not suit everyone
Savings: around £50 a year
Washing your clothes at lower temperatures, for example at 30°C instead of 40°C, will use about 38% less energy. 30°C will often be suitable for your regular weekly washes if your clothes are not heavily stained. Using liquid detergent will help ensure your clothes are thoroughly washed while saving you energy.
Also, try drying your clothes on a rack instead of in a tumble dryer. This should be easy during hot summer months and if you dry your clothes this way, you might avoid the need for ironing, as clothes dry less creased.
Cancel subscriptions you don’t use or need
Savings: £10 to £60 a month, depending on how much you’re currently spending (and if you pay for the TV and broadband)
Chances are, after your free trials ended, you have tens of subscriptions you just forgot to cancel. Always make the most of free trials, but set a reminder in your calendar the day before the free trial expires to cancel it on time and avoid being charged.
Carefully go through your bank statements or log in to your app store to check which apps are stripping you of cash. After you’ve cancelled the ones you don’t use at all, move to the ones you use regularly and think about the habits you’ve developed while using these and try to find free replacements. For example, there are thousands of free high-quality workouts on YouTube, which could easily replace routines on your fitness app.
You can also disconnect from cable TV and save on paying for a TV licence by switching to streaming services like Netflix which offer a bunch of interesting original content. Netflix also allows you to stream from multiple devices (the number will depend on the level of subscription), making it easy to share subscription costs with family and friends.
Save on your groceries
Savings: see below
With grocery prices increasing, it is as important as ever to choose where you shop and how much you spend. For many households across the UK, groceries are one of the most prominent weekly expenses. Therefore, if you cut your grocery costs, you will be able to save significant sums over the year:
|Save per week||Save per year|
1. Plan your grocery shopping
Shopping less frequently for your groceries allows you to plan your meals better and reduces the likelihood of purchasing something you don't need. Shopping online is ideal for this because you have complete control over your basket and can easily add and remove products and always have the total displayed, unlike in a physical store.
Most grocery stores now offer home delivery, which makes it a convenient option for weekly shopping. You can also use apps like Whisk and Yummly to plan your meals and create shopping lists.
2. Batch cook
Prepare two or three portions of your favourite dish to freeze/store in the fridge. This ensures that nothing goes to waste and saves you time because you won't have to prepare lunch the next day. It's a win-win situation!
3. Avoid food waste
Remember it is still safe to eat food past a ‘best before’ date, but always dispose of items that have passed their ‘use by’ date.
While we recommend doing most of your grocery shopping once a week or so, it's best not to buy too many fresh items because they could go bad before you can eat them. Create a list of the fresh ingredients you will need and pop down to the shop to pick them up, as and when you need them.
4. Shop for store's own brand
Branded products are often more expensive simply due to their nicer packaging. In most cases, buying staple foods, like rice and pasta, as well as medicines and cleaning products from the store's own brand will save you some money, without you having to compromise on the quality.
5. Make use of the food apps that can help save money
Many restaurants have leftover food at the end of the day, which the TooGoodToGo app sells for a fraction of the original price. You can pick up ‘mystery bags’ containing delicious meals for you to enjoy. Many restaurants, sandwich shops and cafes can be found on TooGoodToGo, so check out what is available for pick up in your area.
Olio also tackles the issue of food waste by connecting people with neighbours and local businesses to pick up surplus food (raw or cooked) and other household items for free. This could be food nearing its sell-by date in local stores, bread from a local bakery or spare ingredients in someone’s fridge that would otherwise be wasted.
6. Order takeaway directly from the restaurant
Delivery services like Deliveroo will often charge extra for their services, making your takeaway meals more expensive. If you order directly from your local restaurant, you will save a few pounds on each order, which can add up to £40 by the end of the month, if you are a regular takeaway customer.
Manage your debt
Savings: Depends on how much debt you have/need
During the cost of living crisis, paying off your debt might not be at the forefront of your mind, but it’s important to reduce your monthly payments. As inflation rises, interest rates are increased, making it more expensive to borrow money and more rewarding to save. This means that your mortgage, credit card payments and bank loans could all become more expensive.
Interest charges can accumulate to large sums over time, so it is important to manage your credit card and any other debts and strive toward repaying them as soon as possible. Here are some of the ways you can win some time and save some money:
Credit card debt
When you transfer the balance from one credit card provider to another, you will often have an interest-free period. This will give you some relief from costly interest rates. If you manage to clear your debt within this period, you can save a significant amount of money on interest charges. However, keep in mind that the interest tends to jump at the end of the promotional period, so make sure you pay off the balance before this happens.
Personal loan and overdraft
Having an overdraft can be very expensive, especially if your bank account has a high EAR (effective annual rate). You can get switching bonuses by switching accounts: some banks offer around £150 to new customers.
If you have multiple debts, getting debt consolidation loan may help you bring all of them together, which will help you create a clear repayment plan. Debt consolidation may offer a lower interest rate as well.
If you have a mortgage, you may look into switching mortgage rates, meaning you move your mortgage from your current lender to another that offers a better rate. If your fixed term mortgage has come to an end you may be charged a ‘loyalty’ penalty of high interest, which could cost you as much as £1000 a year.
If, however, you’re on a fixed term and want to switch, you might have to pay an early exit fee. Consider shopping around for a cheaper deal towards the end of a fixed term to save some much-needed money. It’s also best to change from a variable rate to a fixed one to protect yourself against rate rises expected this year.