What can we predict for our finances going into next year? - Sarah Coles

Your budget will be even more stretched by higher prices

The good news is that we may have seen the peak of inflation. November’s drop to 9.9% still leaves us close to 40-year highs, but we may have seen the top. The Bank of England is predicting inflation will fall away at the start of 2023, as last April’s massive energy price hike drops out of the figures. It then expects recession to suck demand out of the economy, so it works its way down to around 5% by the end of 2023, and even lower the following year.

Unfortunately, lower inflation doesn’t necessarily mean lower prices. We could see some prices drop back, but in many cases, we’ll still need to wrestle with higher bills and more expensive shopping. It means for many people this is a case of things getting worse more slowly - rather than necessarily improving.

You’ll pay more tax

Even before the tax hikes of the Autumn Statement, we were set to pay more tax in 2023. The major culprit is the freezing of the income tax thresholds, which means wage rises will push more people into paying more tax – and push more people into a higher tax band too.

On top of this, if you’re a higher earner, there was more bad news in the Autumn Statement. The additional rate threshold was cut from £150,000 to £125,140, so anyone earning between the old threshold and the new one will lose an average of £621 a year and those earning over £150,000 will lose an average of £1,256.

If you run your own business and pay yourself in dividends, there’s also the threat of more dividend tax as the allowance halves in April. This could also affect investors with large portfolios outside an ISA or pension, who will be wrestling with a halved capital gains tax allowance too. When you add in higher council tax and the frozen inheritance tax allowances, you’ll be stung for more tax on all sides.

Energy bills will rise

The Energy Price Guarantee will keep a lid on energy prices into 2023, but still annual bills for the average user will rise to £3,000 from April, and we’ll lose the universal lump sum payments at that point too.

It’s a long way short of the horrors we could have expected without the guarantee, and there will also be extra cost of living payments for those on means-tested benefits, pensioners and people receiving specific disability benefits. However, given that already a quarter of us are usually unable to keep warm at home, two thirds are trying to use less gas and electricity, and half of us find it difficult to pay energy bills, this doesn’t bode well for next year.

Any remortgage may not be as painful as you fear

The fact that the Bank of England is expecting inflation to fall is good news for borrowers, because it should keep a lid on interest rate rises. They’re expected to keep climbing in the new year, and should get to around 4.5%. However, the Bank then expects this to drop back as the recession takes hold.

These lower-than-expected forecasts are already being factored into mortgage rates, which is why we’ve seen them pull back from the eye-watering rates of almost 7% in the aftermath of the mini budget. Average two-and five-year-fixes are down below 6%, the best rates are below 5%, and there’s every chance that more falls are on the cards. We don’t know how low they will go, or how long it will take – which makes it difficult to find the best possible time to fix, but for those who crave certainty today, it means you won’t have to pay such a high price for it.

Savings rates may drop back too

In the short-term, rate rises are likely to mean we see the most competitive easy access rates continue to inch up beyond 3%. However, in the fixed rate market it’s another story entirely, because those same lower rate expectations are going to have a less positive impact.

We’ve already seen some of the most competitive fixed rate savings deals pulled, and we can expect the best rates to drop further. If you’re waiting for the best moment to fix, you may have missed it, and it doesn’t pay to hang around. However, on the plus side, with inflation forecast to be around 5% by the end of next year and under 2% in 2024, there’s a chance that the best two-year fixes could beat inflation.

Property prices are likely to fall

Higher interest rates have already taken their toll on confidence in the property market. It takes a while for subdued demand and lower offers to filter into price data, but when they do at the start of 2023, we’ll see rapid price rises deteriorate into falls. Now that interest rate forecasts have come down, predictions aren’t quite as dire as they were back in October, but we can still expect prices to be on their way down during the year.

There may be less positive news for jobs

We’ve got used to a buoyant jobs market in the past few years, so more people have had job security and plenty of alternative options, but the Bank of England warned in its Monetary Policy Committee report that we could be seeing a subtle shift. Things aren’t going to change enormously overnight, but the most recent set of figures showed that unemployment has risen very slightly and vacancies are falling, and once we’re in the heart of the recession, we may well see the jobs market become decidedly less secure.

Unfortunately, the good news for 2023 is decidedly thin on the ground, as recession dominates, and makes life tougher on all fronts. We may see inflation drop away, interest rates fall, and mortgage affordability ease a little, but against the backdrop of a struggling economy, it’s likely to be cold comfort.

Trials of renting

Difficulties affording a home mean we’re renting later in life. Over the last decade, the proportion of people aged 24-64 living in their own home has fallen and the proportion renting privately has risen. The figures are highest among 24-45-year-olds, where the share of private renters has risen from one in five to one in four.

We’re paying a huge price for this, because in 2021/22, on average, mortgagors spent 22% of their household income on mortgage payments, whereas rent payments excluding housing support were 38% of income for private renters. As a result, tenants have their budgets stretched horribly thin, so only 52% of them have savings – compared to 78% of those who live in their own home. This makes it even harder to get onto the property ladder, and exacerbates the vicious cycle.