How the New Financial Year Will Affect UK Households

April 2025

How the New Financial Year Will Affect UK Households

As the UK enters a new financial year, many households are bracing for a variety of changes that could affect their finances. From tax adjustments to inflationary pressures, the start of this new fiscal period comes with a mix of potential benefits and challenges. In this article, we’ll break down the key changes that UK households need to be aware of and how they could impact their budgets moving forward.

Changes to Tax and National Insurance Contributions

One of the most significant changes to household finances in the new financial year is the shift in tax bands and National Insurance contributions.

Income Tax: For many, the new financial year means a slight increase in the personal income tax allowance. However, in real terms, the tax burden on the middle-income earners may still feel heavy due to the ongoing freeze in income tax thresholds. This means that while you may not officially move into a higher tax band, you could still end up paying more in taxes as wages rise with inflation.

National Insurance: The National Insurance (NI) contributions threshold has been frozen, which means that workers will continue to pay higher amounts as their earnings increase, pushing more people into the higher contribution brackets. This freeze could significantly impact higher earners and those who are self-employed.

Tax-Free Allowance: The freeze on the £12,570 personal allowance (the amount you can earn before you start paying income tax) will also remain. As wages slowly increase in line with inflation, many will see a larger portion of their income taxed, meaning their net income will not grow as expected.

Cost of Living Pressures Continue

The cost of living crisis that has plagued the UK for the last few years is unlikely to ease anytime soon. With inflation still hovering around high levels, many household budgets will continue to feel the squeeze.

Energy Bills: While energy price caps were introduced in previous years to ease the burden on households, the energy market remains volatile. While there may be some relief from government schemes and price caps, many households will still face rising utility costs. Energy bills will continue to be a major concern, particularly for larger families and those living in energy-inefficient homes.

Groceries and Day-to-Day Spending: The price of essential goods such as food, transportation, and housing are expected to remain high, potentially further squeezing household budgets. The latest reports indicate that grocery inflation is still a major issue, with food prices rising at a faster rate than wage growth. This means families will likely have to cut back on non-essential items in order to cover basic needs.

Increased Interest Rates

Another significant development that will affect UK households in the new financial year is the likelihood of rising interest rates. The Bank of England has been increasing interest rates in an effort to curb inflation. For households with mortgages or other loans, this could mean higher monthly payments.

Mortgage Payments: Those on variable rate mortgages may find themselves facing higher repayments as interest rates rise. Homeowners with tracker mortgages are particularly vulnerable to these changes, as their payments will increase in line with the base rate. For many families, this could mean an additional financial strain, especially if inflation continues to outpace wage growth.

Loan Repayments: Higher interest rates also affect personal loans and credit card repayments. Those who rely on credit may see their monthly payments increase, leading to higher overall debt repayments. This could create additional financial stress for households already struggling with the cost of living.

Benefits and Welfare Changes

For some households, changes in benefits and welfare schemes could offer financial relief, but others may face further cuts or freezes to their support.

Universal Credit: The government has made some adjustments to Universal Credit payments. While the payment levels are expected to rise in line with inflation, the freeze on other welfare benefits could still leave vulnerable families struggling. For those receiving state pension or other benefits, the impact of inflation could be severe, especially as the cost of living continues to climb.

Pensioners: On a positive note, pensioners may see a slight increase in their state pension as the government continues its commitment to the triple lock system, which guarantees increases in line with inflation. However, with the increasing cost of goods and services, even a slight increase may not be enough to offset the rising cost of living for retirees.

Investment and Savings Challenges

For households looking to grow their savings or invest for the future, the new financial year may present challenges.

Interest Rates on Savings: While interest rates are rising on loans, they are also increasing for savings accounts, though not significantly enough to offset inflation. Savers may find it harder to keep pace with the cost of living, and many will have to reconsider their savings strategies, turning to higher-risk investments to get better returns.

Stock Market Volatility: The current economic climate, characterized by high inflation and rising interest rates, could lead to volatility in the stock market. Investors who are holding stocks may see fluctuations in their portfolios, and this could discourage household investing plans. With the threat of an economic downturn, many may feel less inclined to risk their savings in the stock market.

Government Support Schemes

The government has committed to offering support schemes aimed at helping households through financial strain. However, the availability and eligibility for these schemes may vary depending on individual circumstances.

Cost of Living Payments: To counteract the financial strain of rising energy bills and inflation, the government may continue to offer targeted support payments, particularly for lower-income households. These one-off payments will provide temporary relief but won’t resolve long-term financial issues.

Energy Support Schemes: There is also potential for new energy support schemes to help with rising energy costs, particularly during the colder months. While these schemes are helpful, they are typically temporary, meaning households will still need to adjust to rising costs in the long run.

Impact on Housing Market

With interest rates rising, the housing market may experience a slowdown, affecting both renters and homeowners.

Renting: Rent prices in the UK have continued to rise due to increased demand and a shortage of housing stock. Those renting may see their monthly rent increase, further stretching their household budgets.

House Prices: For potential homebuyers, higher interest rates could cool the housing market, making it harder to secure a mortgage and increasing monthly repayments. However, this could also bring some relief for first-time buyers, as rising interest rates may slow down house price growth.

Conclusion

The new financial year presents a mixed bag for UK households. While some may see small benefits from government support schemes or slight tax changes, the broader picture remains challenging. Rising energy costs, inflation, and interest rates are likely to continue putting pressure on household budgets.

For many, it will be a year of tight financial management, with an emphasis on cutting costs, adjusting spending habits, and seeking financial support where possible. The key to navigating this period will be awareness—keeping up with changes, seeking out help when needed, and adapting to the shifting financial landscape.