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The Big Squeeze: 7 Financial Challenges We’re Facing in 2022

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Worried about money this year? Well, it’s not surprising! According to Hargreaves Lansdown’s findings, this is the year of the ‘great pressure’, which means that we face serious problems, such as the rising cost of living and rising debt. But what can you expect from 2022? And is there anything you can do to escape the great pressure? Well, here are the seven key financial issues that will challenge us this year, and some tips on how to prepare for them.

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1. Higher energy costs

Energy costs are skyrocketing and we are likely to see further increases in the energy price cap throughout 2022. This may affect low-income families the most, but we will all feel the impact. Fortunately, there are some things you can do to minimize the damage:

  • Upgrade your home’s insulation to save money in the long run.
  • Use your heating sparingly throughout the day.
  • Look for a better deal using price comparison sites (although you may struggle to find a cheaper deal right now).

2. Rising interest rates

Interest rates may go up a few times in 2022. Essentially, higher interest rates mean we can expect things like credit cards, new loans, and mortgages to be more expensive. , so here’s how you could escape the worst effects.

  • Pay off your credit card balances. Ideally, you should pay your balance in full each month to avoid paying interest.
  • Looking for a new credit card or balance transfer? Consider a 0% credit card.
  • Don’t take out a loan unless it’s essential and you know you can afford it.

3. Increase in National Insurance

National Insurance (NIC) contributions will increase by 1.25% from April. This means lower net incomes for many of us at a time when the cost of living is skyrocketing. To manage the increase in network adapters, you can:

  • Ask for a salary sacrifice, which means you’ll get a lower salary, but contribute more to your retirement. Since your salary drops, you will pay less in NICs.
  • Start an emergency fund or open a savings account.

4. Freeze tax allowances

The personal income tax allowance is frozen until 2025/2056. Why is this important? Well, depending on how wages increase over the next few years, many of us may have to pay more income tax. So while the tax freeze may not affect you this year, it’s worth considering its potential impact by 2026.

To offset this challenge, Hargreaves Lansdown suggests you consider a salary sacrifice, which can help lower your tax bill and increase your retirement wealth.

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5. Increased tax on dividends

Do you receive stock dividend income? If you do, note that from April 2022, the tax on dividends will increase by 1.25%.

  • Investments inside ISAs are unaffected as ISA savings are tax exempt (subject to the £20,000 annual limit).
  • Apart from ISAs, everyone has an annual allowance of £2,000 for dividends. You will pay tax on dividends above this amount.

Want to avoid paying more tax on dividends than necessary? Whenever possible, place your investments in an ISA – especially those that offer the highest dividend yields.

6. Inflation

Inflation means the rise in prices over a period of time. This one is extremely relevant right now. From fuel to food, it seems like so many things cost more today than not so long ago! But is there a way to combat rising inflation? Not really, unfortunately. However, there are still steps you can take to reduce its impact on your wallet:

  • Before buying anything, shop around for the best deal.
  • The next time you go to the supermarket, think about your options (for example, your own brand products could be cheaper than high-end brands and be just as good).
  • Avoid impulse purchases.
  • Set a strict budget for non-essential items.

7. Negative inflation

According to research from Hargreaves Lansdown, the value of your salary may drop in the first few months of 2022. In other words, you may find that your money isn’t going as far as it used to.

The good news? There is hope that we will see a recovery in wages at the end of 2022, so we shouldn’t be too discouraged about that just yet. Nonetheless, here’s how you might handle the impact of lower wages or “negative” inflation this year.

  • Have you been promoted recently or do you have more responsibilities than before? Consider asking for a raise.
  • Look for a new position – you never know, another employer might pay you more for the same job you are doing now!

You can also try learning new skills to increase your chances of getting a promotion or a raise.

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Simply put, none of us can completely avoid the big pressure. However, it is possible to reduce the pressure on your wallet with careful financial planning. Set yourself a strict budget, seek out the best deals on the products you need, and always seek help from charities such as Citizens Advice if you run into any difficulties.

Please note that tax treatment depends on the individual’s particular circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decisions.

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