High inflation isn't going away in a hurry despite Rishi Sunak's pledge: Sarah Coles

We’ll get a first indication of whether Sunak’s pledge is on track next week, with the release of the latest inflation figures.

They’re likely to show that we’re past the peak – which may well have been 11.1 per cent in October. Unfortunately, this may not be the good news it initially seems.

The first problem is that inflation isn’t going to plunge from here, and the Bank of England has warned that it’ll be relatively sticky.

It may well halve during the year, but thanks to higher natural gas prices, a tight labour market, and continuing supply problems, it’s not going to do so in a hurry.

Inflation has been over 9 per cent since April last year, and we can expect it to remain there or there abouts for a while to come.

Even when it starts to fall back, aside from a few isolated examples, falling inflation doesn’t actually mean lower prices - it just means prices will rise more slowly than a year ago.

Take energy, for example, in April we’ll be a year on from the massive 73 per cent hike in the energy price cap, so this will automatically drop out of the inflation figures, helping push inflation down.

However, at the same time, the energy price guarantee will rise from £2,500 to £3,000 for a typical user, and we’ll have had the last of the universal lump sum payments to help us cover the cost.

It means that while energy price inflation may fall, our expenses will rise significantly.

Meanwhile, we’ll have been bearing the brunt of rising prices for so long that we’ll be far less able to cope.

The third wave of the HL Savings & Resilience Barometer, out this week, showed we’ve already lost three fifths of the boost we got during the pandemic from things like lockdown saving.

Those on lower incomes have been hit hardest, because the inflation rate for essentials has risen at twice the rate of non-essentials, and the basics make up a far bigger proportion of their spending.

At this stage in the cost-of-living crisis, the Barometer shows that almost nine in 10 of the lowest income households have poor or very poor financial resilience.

And as the crisis has stretched on, middle earners have started feeling the pain too, with almost a third in the same state.

Middle earners may also face threats from rising interest rates, especially if they need to remortgage this year.

The ONS calculates that 1.4 million fixed-rate mortgage borrowers will come to the end of their deal in 2023.

Most of their current fixed rates are under 2 per cent, and new deals are coming in at closer to 6 per cent. It has worked out that remortgaging will cost them an average of £250 a month more.

The Barometer shows that as a result, remortgagers are likely to suffer a blow to their resilience.

The fact they’re having to find such a significant chunk of cash each month means some of them will pay less into savings, others will spend their way through their cash reserves, and some will end up building short-term debts through things like credit cards.

It means that anyone facing a hike in their mortgage payments needs to work out how on earth they’re going to afford them.

The answer may lie in stringent budgeting and cost-cutting.

In some cases, if you’ve already cut everything you can, it may mean revisiting the mortgage itself, and considering whether you can temporarily move onto an interest-only deal, or stretch the mortgage over a longer period. Both will bring down monthly payments, but need very careful thought. You need to appreciate the price you’ll pay for the temporary relief.

If your fixed mortgage is expiring, you also need to tackle the question of whether you should remortgage now, or join those reverting to the SVR and waiting for fixed rates to fall. This is widely expected over the coming months, and could save substantially on mortgage payments. However, there’s a balance to be struck, because interest rates may well rise in the short term, which would bring immediate pain for those on variable rates, with some SVRs over 7 per cent, and set to rise

Choosing to wait and see means taking a gamble, because it’s impossible to say how far and how fast those fixed rates will move, so we can’t accurately calculate the best approach. Your decision whether to wait or to fix will therefore depend on how important certainty is to you, and how much of a gamble you are prepared to take with a cornerstone of your finances.

We’ve saved £54.8 billion in tax on pensions – plus more on ISAs and savings

Pension schemes are expected to save us £27 billion in income tax this tax year, and £27.8 billion in National Insurance, according to new figures from HMRC.

Pension tax relief is a real hidden hero of pensions, with an £80 contribution from a basic rate taxpayer – or a 60 per cent contribution by a higher-rate taxpayer - boosted to £100 by the taxman. The sheer scale of the impact is a timely reminder for higher rate taxpayers to check they’re claiming higher rate relief within their self-assessment tax returns.

Meanwhile, the same set of figures showed that ISAs are set to save us £4.3 billion in income tax and capital gains tax this tax year – up a fifth in a year. Given the endless tax hikes coming this year, and the enormous pressure on our budgets, every penny we can save in tax makes a huge difference.

Frozen income tax thresholds and big cuts to the allowances for both CGT and dividend tax in April make tax breaks more valuable than ever, so if you haven’t taken as much advantage of your ISA and pension allowances as you can, it’s well worth seeing what you can afford to free up this side of April.

The figures also reveal the impact of rising interest rates on savings. The personal savings allowance (where the first £1,000 of interest is tax-free for basic rate taxpayers, and the first £500 is tax-free for higher rate taxpayers) is on track to save us £590 million this year – up an impressive 69% in a year. For many people, rising rates will also have pushed them over the threshold, so they will have started paying tax on their savings for the first time in a long time. It means that, particularly for higher earners, cash ISAs may offer the opportunity to save tax too.

Sarah Coles is Senior Personal Finance Analyst for Hargreaves Lansdown and Podcast Host for Switch Your Money On