Investment firm AJ Bell has urged millions of UK households to plan carefully for the new year, warning that a £100 energy rebate should not be treated as free money. With inflation remaining persistently high and energy bills set to rise, up to 20 million homes in England are in line for the payment, but experts say it is designed to help with energy costs, not Christmas spending.
Inflation and Energy Price Cap Pressure
Inflation stands at 3.5 per cent, up from 3.1 per cent in August, and could climb further in the new year. Ofgem's energy price cap is set to rise sharply, driven by the ongoing conflict between Israel, the US, and Iran. Estimates on how much bills could increase in January vary, with analysts at Cornwall Insight predicting a £276 climb, while others suggest it could be as much as £400. These would be the biggest rises in four years, since Russia's full-scale invasion of Ukraine.
The Budget, announced by Chancellor of the Exchequer John Healey last week, offered some respite. Up to 20 million households in England are set to receive a £100 payment to help with energy bills this winter. Prime Minister Andy Burnham has also cut VAT on domestic energy bills to 0 and continued the 5p cut on fuel duty.
Rebate Delivered Through Council Tax
Speaking on AJ Bell's Money & Markets podcast, Sarah Coles said the changes would help, but stressed that other steps were needed to prepare for an expensive time of year. "I think the big story was some of the changes they were making. They've been called 'little fixes' or 'everyday fixes'. It's like Bob the Builder - he's constantly on the mend. I think there are lots of different bits and pieces that they are hoping will add up," she said.
"They've absolutely majored on energy this time around. The big change is this rebate. It's done through the council tax system which, if you remember back to 2022, that's how they did it last time. They are going to give people in those council tax brackets between A and D a £100 rebate. And that is a sizeable difference."
Coles also noted the VAT cut on electricity bills, plans to extend it, and changes to green levies, which will be taken through general taxation rather than bills. "So all of these things will add up," she said.
Planning for Painful Increases
Coles warned that the energy bill hit at the beginning of the year will be "incredibly painful" and that interest rate changes will feed into mortgages. "Anyone who is coming up for remortgage is potentially facing much higher mortgage repayments. And then if you look at the changes to property income, you can find some landlords will build that into higher rents so that could rise as well," she said.
She added: "We know that pain is still going to be there - there is going to be a much higher cost and people do need to plan for them. I'm not ringing the alarm bells and saying there is going to be that hideous inflation, but there is going to be some chunky increases and it is worth planning in advance, seeing what room you've got, and seeing where you can cut your costs so when you are hit in the face with them, you are not knocked out."
Risk of Treating Rebate as 'Free Money'
The payment is available for people living in properties in council tax bands A to D in England, with funding given to Scotland, Wales, and Northern Ireland to make the payment as well. The Welsh Government has committed to a similar payment, while the Scottish Government said it would 'seek to replicate' it. The Northern Irish government does not have the legal authority to make the £100 payments unless it agrees its budget.
AJ Bell's Dan Coatsworth highlighted a risk with the payment: "What I thought was quite interesting was that the government said this £100 it's going to give to, I think it's about 20 million people. I think I'm expecting headlines. It's almost like there's a lottery win. You know, suddenly they're paying it straight into your bank account. There's a risk there that people just see it as, 'this is free money, I'm just going to go and spend it'. Of course that would feed into the economy, but it's designed there to help with your energy bills. That's why you're getting it in January, when the price cap changes, not in December when you can use it to buy your Christmas presents."
The Government has said the support is to help households with the cost of energy but, as it will go into your bank account, they have no way of regulating how the money is spent.
