How to reduce your outgoings when living on a reduced income.

21st April 2020

The incomes of many households across the UK have been seriously impacted by the coronavirus. More than 9 million people are expected to be furloughed*, the self-employed who are eligible for help will not receive it until June, and some people are not eligible for any of this help including the recently self-employed.

WEALTH at work – a specialist provider of financial education and guidance in the workplace, has outlined some ideas on how to manage your income and reduce your outgoings. This includes mortgage holidays, deferred debt repayments and changes to the way you shop to give people a better understanding of their financial options and encourage them to take action in these difficult times.

1. What will your new income actually be? – If you or a member of your household has been furloughed, it means that they have been given a temporary leave of absence. The income payable during this time is normally 80% of gross monthly salary but no more than £2,500 per month. This is processed through payroll, and the employer is reimbursed the payments through the government’s Coronavirus Job Retention Scheme. This scheme is available until the end of June 2020.

For example an employee earning a £30,000 p.a. salary, or £2,500 p.m. would receive 80% of their monthly salary or £2,000 p.m. whereas an employee earning £37,500 p.a. or more would receive the maximum payment of £2,500 p.m.  Employers have the option to top up the payments made to furloughed employees, however this is at the discretion of individual employers.

Tax, National Insurance and pension contributions are normally deducted from furlough payments. This means that someone earning a £30,000 p.a. salary and paying 5% pension contributions would actually receive £1,595 p.m. net when furloughed, when previously they received £1,918 p.m. net from salary, a difference of £323. Someone earning above £37,500 p.a., would receive £1,918 p.m. net when furloughed.  If this employee had been receiving a salary of £60,000 p.a. and paying 5% pension contributions they would have received a net salary of £3,475 p.m. before being furloughed. The furlough payment would result in a reduction of £1,557 p.m. to this employee’s net income.

2. What does it mean for the self-employed? – The government has announced a taxable grant for the self-employed. As a self-employed person you may be entitled to a grant if you submitted a self-assessment in 2018/19, traded in 2019/20, and intend to continue trading in 2020/21. In addition, you must be trading or would have been trading if you had not been impacted by the coronavirus, and have lost trading profit due to it.

A calculation is used to determine the grant payable under the scheme. The average total trading profit of the past three years is used to calculate a monthly amount. 80% of these average profits are used to calculate a monthly grant, up to a maximum of £2,500 per month for 3 months. The grant is paid by HMRC in one instalment which is likely to be in June 2020.

3. What can you do if you are struggling to pay your mortgage or rent? – The Government has agreed with mortgage lenders that they will offer a mortgage holiday. This can provide home owners who are struggling to pay their mortgage a 3 month break from making mortgage payments. It is intended for homeowners and landlords and will not affect your credit rating. This is available to those who are up to date with their repayments. Those struggling with their repayment should contact their providers as soon as possible. When monthly payments start again they will be recalculated and may increase.

Legislation has been taken forward to protect tenants from eviction for at least a three-month period. Speak to your landlord about your rent payments if you are in financial difficulty. Landlords and tenants are expected to work together to establish an affordable repayment plan. Your landlord may be able to take a mortgage holiday and therefore delay your rent payments.

4. How to manage overdrafts and debt payments – When it comes to overdrafts, debt and savings, the support available from high street banks and building societies varies but includes deferral of repayment for up to 3 months on credit cards and loans, interest free overdrafts up to specified limits and early access to fixed rate savings accounts without penalty. The regulator is proposing that firms will be expected to offer a payment freeze on loans and credit cards for up to three months, and an interest free overdraft up to £500. Lenders will have the option to offer greater flexibility if they wish. Importantly, speak to your providers before any payments are missed.

5. Should you continue to pay into your pension? – You may be able to reduce or pause your contributions if you are in financial difficulty. However, plan carefully before doing this, because if you can afford to continue making regular investments during a market downturn, this may generate positive long-term return as investments recover. Pension contributions for furloughed employees will continue but these will usually be based on the reduced furlough payment.

6. Think about where and how you shop – By switching brands it might be possible for you to significantly reduce the price of your regular shop. In addition, by planning for your weekly shop in advance, it may help you to search for deals and reduce expenditure on non-essential items. Discount vouchers are often available through voucher and discount websites, and some people have access to discount vouchers through their employer. This could be crucial if you have to make a big purchase, such as if your washing machine or vacuum cleaner breaks.

7. Check if you are paying too much for your utilities and broadband – It is possible to save a lot of money by shopping around for cheaper utilities and broadband providers. There are many comparison services out there to help you make the switch. For example, by shopping around 50% of people could achieve a saving of £369 on their dual fuel energy cost according to comparethemarket.com May 2019 data.

8. Review all your outgoings – Now is a good time to cancel any unused subscriptions, or unused memberships you have forgotten to cancel. If you can’t afford them, now is the time to get rid of them. In fact, many gyms are already pausing their membership fees at the moment, as are some other subscription services which cannot be used such as cinema passes.

9. Staying in is the new going out, but a lot cheaper! – It is surprising the amount of money which is usually spent by households on nights out, day trips, holidays and experiences. Now that these are not an option, there is a lot of money which can be saved.

10. Beware of investment scams – Unfortunately in turbulent times like these, when people are concerned and vulnerable, scammers see an opportunity! It is important to be on your guard. Scammers tend to sound completely legitimate when they contact you. It’s easy to see why so many people are fooled and it isn’t small amounts of money which are being taken. If someone contacts you with an offer which seems too good to be true, it’s vital to check whether the company is registered with the Financial Conduct Authority (FCA). You can also visit the FCA’s ScamSmart website which includes a warning list of companies operating without authorisation or running scams.

Jonathan Watts-Lay, Director, WEALTH at work, comments; “I hope it is reassuring for people to realise that help is available, whether it be mortgage holidays or deferred debt repayment, and that with some careful planning, there are many ways to cut back on your outgoings. The savings you can make will be determined by your circumstances but for many people this will be crucial to managing the weekly and monthly budget. It is important to start with a clear plan showing your income and outgoings and ensure you speak to your service providers and lenders before any payments are missed”.

*Resolution Foundation using figures from the British Chamber of Commerce (BBC News)