There are lots of different phrases and words being used to talk about the cost crisis or cost of living crisis. Some of these you may not have heard of before. We’ve put together a list of some of the most commonly used words and phrases that you might see in the news or on social media and explained what they mean below.
You can skip to an explanation using the following links:
- Budget
- Corporation Tax
- Cost of living
- Cost of living crisis or cost crisis
- Energy price cap
- Energy rebate
- Green levy
- International Monetary Fund (IMF)
- Inflation
- Interest rates
- Bank interest rate or base rate
- National Insurance
- Stamp Duty / Land and Buildings Transaction Tax
Budget
A budget is a plan for your money, setting yourself an amount of money to spend each week or month can help you save for other things in the future. It also helps you control your finances better by controlling your spending decisions for grocery shopping, educational purposes, or unexpected expenses. Learn more about how to budget here.
A budget announced by the Government is usually done once a year and is a budget set by the HM Treasury for the following financial year (which runs from 1st April to 31st March). The plan for the budget is announced by the Chancellor of the Exchequer who makes a statement to the House of Commons which outlines what is happening in the economy and planned changes to taxes.
Corporation tax
A corporation tax is a tax on the profits of a corporation (an organisation or company). The taxes are paid on a company’s taxable income, which includes revenue minus the cost of goods sold, general expenses and other operating costs.
You must pay Corporation Tax on profits from doing business as:
- a limited company
- any foreign company with a UK branch or office
- a club, co-operative, a community group or sports club
Cost of living
What is the cost of living? Simply, it’s the level of prices for everyday items. This includes the cost of housing (like rent or a mortgage), food and drink, bills (like gas and electricity) and other essential items.
Cost of living crisis or cost crisis
You may have heard this term a lot in the news or on social media. The cost of living crisis or cost crisis is about the price of essential items rising faster than the amount of income a house has. For example, people’s wages or benefits may have stayed the same but the cost of food, rent and energy bills have all increased. This can leave households with less money or not able to afford items or pay bills.
There are lots of reasons for this, we’ve outlined some of the reasons below:
- The war in Ukraine has impacted supply chains of products like grain, maize and sunflower (used for cooking oil) and Russia has cut supplies of gas to Europe, impacting our energy bills.
- The COVID-19 pandemic has also impacted demand. During the lockdown, we weren’t spending as much, and businesses were temporarily closed. When restrictions were lifted there was lots of demand all at the same time, this meant there was lots of demand for energy all at once. We also started needing more of the same thing, for example, lots of people started working from home so there was more demand for products like laptops. When there’s more demand, prices start to rise.
- There are also more job vacancies than there are people to fill the jobs. This means employers are offering higher wages to attract staff, which drives the prices of goods and services up.
- Climate change is impacting weather patterns around the world, some areas are experiencing drought while other areas are facing floods. This impacts the ability to produce crops and also can impact a country’s ability to produce hydroelectric power as rivers, lakes and reservoirs dry up.
Energy price cap
The energy price cap sets the maximum amount that suppliers can charge you for each unit of gas and/or electricity that you use.
This doesn’t mean there is a maximum you can be charged each month. What you will be charged will depend on how much gas and electricity you use. If you use more, you’ll pay more and if you use less, you’ll pay less.
The price cap also limits the daily standing charge. This is the fixed amount you have to pay (to have your home connected to the grid).
Ofgem, the energy regulator, set the energy price cap.
On 26th August, they announced an 80% increase in the price cap which would rise to £3,549 per year from 1st October 2022 (it was previously £1,971). This meant that the price of electricity would rise on average from 28p per kilowatt-hour (kWh) to 52p in the October to December period. And gas would rise from 7p to 15p per kWh.
On 8th September, Prime Minister Liz Truss announced that the new energy price cap will be fixed at £2,500 a year for a typical home.
This is still an increase in the energy price cap from October 1st 2022, but it’s less than previously advised. The energy bill discount will still apply and so the average payment will be £2,100 per year.
On 17th October, the new Chancellor, Jeremy Hunt, announced that the Energy Price Guarantee will now be limited until April 2023, this is a change from the original announcement which was going to fix the price cap for two years.
From April, Jeremy Hunt has advised there will be a more targeted approach which aims to support those most in need.
According to the sector’s leading forecaster, this means the average annual energy bill will rise to more than £4,000 from April. This is significantly higher compared to the current price guarantee scheme which limits typical household bills to about £2,500 a year.
Energy rebate
This is a £150 back from the council if you pay council tax and your home is in bands A- D. The person who pays the council tax will receive the rebate and if you pay by direct debit the payment will go directly into your bank account (payments started in April 2022). If you don’t pay by direct debit, your local council will contact you to provide information on how you can get the rebate.
This scheme closes on 30th September 2022.
If you’re not sure what council tax band your house is, visit the UK Government website.
Green levy
The green levy is an environmental charge added to energy bills. The money goes towards schemes such as supporting energy efficiency improvements in homes and businesses and encouraging renewable technology.
The levy currently typically makes up 8% of the average energy bill.
International Monetary Fund (IMF)
The International Monetary Fund (IMF) is an organisation made up of 190 member countries that work together to bring sustainability and growth to the global economy. They do this by:
- Tracking economic and financial events
- Advising its members on how to improve their economies
- Issuing short-term loans to countries that are struggling
You may have seen the IMF in the news because on 28th September they said the measures that were outlined in the mini-budget by the UK Government could make the cost of living crisis and inequality in the UK worse.
Find out more about the IMF on its website.
Inflation
Inflation is the increase in the price of goods or services across an economy over time. For example, if a packet of biscuits costs £1 in January 2024 and costs £1.05 in August 2024, the inflation rate is 5%.
The rate of inflation is calculated by the Office for National Statistics and they do this by looking at the cost of a ‘basket of goods and services’. In the basket, there are 700 things that people buy regularly, like bread and bus tickets. The prices of these items are compared each year and the change in price level is the rate of inflation.
A steady level of inflation is good for the economy. The Government sets a target for inflation which is 2% and the Bank of England’s job is to keep inflation at 2%. The Bank of England does this through different things, one of the main ones is increasing or decreasing interest rates.
Interest rates
Interest rates tell you how much it costs to borrow money or the reward for saving money.
When you borrow money, interest is the cost of borrowing the money and is a percentage of the amount you are borrowing. The higher the percentage, the more money you have to pay back. For example, if you borrow £100 and the interest rate is 5% you will have to pay back the £100 and £5 interest, which is £105.
When you save money, interest is how much you will earn for keeping your savings in your account, as the bank is borrowing the money from you. The higher the percentage, the more money will be paid into your account. For example, if you are saving £100 and the interest rate is 2% you will earn £2 in interest, which will give you £102 in a year.
Bank (Interest) Rate or Base Rate
This is the key interest rate in the UK which is set by the Bank of England. This interest rate will impact other interest rates, for example, what banks or building societies set as their interest rates.
When the bank rate changes, banks and building societies will likely change their interest rates. This can impact things like interest rates on credit cards, mortgages, loans and on our savings.
Interest rates impact inflation because it makes it more expensive for people to borrow money and encourages people to save money, this means people are spending less money. If people spend less money, the prices will normally rise more slowly which means a slower rate of inflation.
National Insurance
Everyone in the UK, over 16 and earning over £242 a week, or self-employed and earning over £6,725 a year, pays National Insurance. If you’re employed, the payment automatically comes out of your payslip and goes toward paying for your state pension and things like maternity leave.
Stamp Duty / Land and Buildings Transaction Tax
If you are in England or Northern Ireland you must pay Stamp Duty Land Tax if you buy a property or land over a certain price.
In Scotland instead, the Land and Buildings Transaction Tax is applied to purchases of land or property, both residential and non-residential. Land and Buildings Transaction Tax replaced UK Stamp Duty Land Tax in Scotland on 1 April 2015.
The level at which you pay stamp duty in England and Northern Ireland changed in the mini-budget, however, the level at which you pay Land and Buildings Transaction Tax in Scotland has not changed.
Check out our information on National Insurance and how to find your National Insurance number.