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Money: What to expect in 2023

Budget planning ideas for 2023. Investment, money planning, savings, mortgage rates. real estate Coins and wooden blocks lined up 2023
Money: It's a good idea to get to grips with what’s likely to be on the way, so we can prepare for it. Photo: Getty

This time of year is traditionally when analysts issue forecasts for what the next 12 months might hold in store.

Unfortunately, this year this annual tradition has all the upbeat positivity of the Ghost of Christmas Yet to Come ⁠— but without the opportunity to wake up on Christmas day and change the outcome.

It’s tempting to give the crystal ball gazing a skip for once, and live in blissful ignorance, but we need to know what’s likely to be on the way, so we can prepare for it.

Get ready for higher prices

The good news is that we may have seen the peak of inflation, but the bad news is that prices are still on the rise.

The Bank of England has predicted that inflation will start to drop back from around April next year, until it hits approximately 5% in December.

Read more: 2022: Year in review

However, there are no guarantees, and even if these forecasts are right, falling inflation doesn’t mean lower prices. The odd thing may get a bit cheaper, but largely we’ll be stuck paying more expensive bills and higher prices. Essentially this is things getting worse more slowly rather than getting any better.

Smart meter in the kitchen of a home showing current energy costs for the day

Design on screen my own. Please see property release.
Annual bills for the average user will rise to £3,000 from April. Photo: Getty

Energy bills will be going up

The Energy Price Guarantee will keep a lid on prices into 2023, but annual bills for the average user will rise to £3,000 from April, and we’ll lose the universal lump sum payments at that point too.

Given that one in four people are already struggling to keep warm at home, and half of us find it hard to pay our energy bills, it means it’s going to be even more difficult to stay on top of this in 2023.

You’ll need to factor in more tax too

This has been on the cards since the income tax thresholds were frozen in April this year. It doesn’t sound much, but stealth taxes like this can make a huge difference to the tax we pay, and now that the thresholds have been frozen until April 2028, they’re going to do an awful lot of damage in the interim.

The idea is that as we get pay rises, we’ll cross these thresholds. The Office for Budget responsibility says that by the end of the freeze, 3.2 million more people will pay income tax and 2.6 million more will pay higher rate tax.

Read more: How to manage Christmas debts

The Autumn Statement piled on more tax misery, particularly for higher earners. The additional rate threshold will be cut from £150,000 to £125,140 in April, which will cost anyone between the new threshold and the old one an average of £621 a year.

Plus the dividend tax and capital gains tax allowances will both be halved in April, causing headaches for investors with large portfolios outside an ISA or pension.

And to add insult to injury, council tax will rise too, by as much as 5%, so you’ll be squeezed by taxes on all sides.

Side view of a businessman wearing a bike helmet and casual businesswear, riding a bike through a residential district in Newcastle-upon-Tyne on his commute to work.
House prices are forecast to fall in 2023. Photo: Getty

Don’t over-stretch yourself in the property market ⁠— because we’re set for falls

We know that confidence in the property market plummeted in the aftermath of the mini-budget in September and October, and buyer demand dried up. It takes around three months for sales to complete ⁠— so January is going to bring a slew of bad news.

The unwinding of the mini-budget got rates under control, which means some of the gloomier forecasts for the property market have been tempered. However, it wouldn’t be a surprise to anyone if prices fell away by 5% or more during the year.

Read more: Top tips for filling in your tax return

It means anyone considering a purchase needs to factor in the fact that property prices may be on their way down. It doesn’t necessarily mean you need to halt a purchase, but it’s worth negotiating the best possible deal, and ensuring you’ll still be happy with your decision if your home loses value in the short term.

It may be a better time to fix your interest rate if you need to

We’re expecting interest rates to rise a bit further, possibly up to 4.5% in early 2023. Then, as recession kicks in, assuming inflation falls as expected, they’re likely to start dropping again. None of this is guaranteed, but the fact that this is what the market expects means it’s already priced in.

For borrowers on variable rates, it means more pain in the short term, but for those looking for a fixed rate, it’s more positive. These forecasts are lower than had been predicted so fixed rates are falling.

Already they’ve dropped from an average of almost 7% in the aftermath of the mini-budget to a little over 6%, and we could see them come down even further. We can’t predict how much further ⁠— or how long this will take ⁠— so it’s always going to be difficult to spot the bottom of the market. But for those who need to fix as soon as possible, lower rates will be good news.

Read more: The true cost of Christmas revealed. And how to cut it

For savers, short term rate rises will mean easy access savings inch up further, and we’re likely to see deals offering over 3%. However, for fixed-rate savings, lower rate expectations in future means some of the most competitive accounts have already been pulled, and we could see the best rates ease off as we head further into 2023.

If you were waiting for a good time to fix, you may have already missed the peak, but there are still good deals available now if you’re quick.

The good news is thin on the ground for next year, because we’re heading for recession, with all the misery that can bring. It means we need to keep a close eye on our finances, so we stand a chance of staying one step ahead of the bad news as life gets tougher.

Watch: How to save money on a low income