The UK prepares for a confluence of tax increases, soaring inflation, and an energy predicament.

• Since March 1992, the U.K. has not seen inflation levels as high as the latest reading.
• Inflation-adjusted average earnings decreased by approximately 1% in November compared to the previous year.
• In April, both income taxes and energy bills will increase, with energy bills rising by more than 50%.

Households in Britain are grappling with a severe cost of living crisis due to rising inflation, stagnant wages, and an energy crisis, which are putting a strain on their finances.

The annual inflation rate in the U.K. has surged to its highest level in nearly 30 years, reaching 5.4% in December.

The government has announced that welfare payments and state pensions will both increase by 3.1% in April, in accordance with the Consumer Prices Index reading from September 2021.

Since the pandemic, the latest official data revealed that average earnings, adjusted for inflation, decreased by approximately 1% in November compared to the previous year, marking the first decline in wages.

Despite opposition from some members of his own party, Prime Minister Boris Johnson is reportedly set to increase taxes on earned income by 1.25 percentage points from April to fund health and social care costs.

The Office for National Statistics in the U.K. disclosed on Friday that one in five British adults reported difficulty paying their bills in the past month compared to the same period a year ago.

Almost 3,500 adults were interviewed by the ONS, and more than two-thirds of them reported an increase in their cost of living since November, with the most common reason being the rise in food prices.

According to Kantar's analysis of over 75,000 products, grocery prices in the U.K. increased by 3.8% between the four weeks leading up to Jan. 23 and the same period the previous year.

According to Fraser McKevitt, head of retail and consumer insight at Kantar, over the course of a 12-month period, the increase in prices could result in an additional £180 ($244) to the average household's annual grocery bill.

It is probable that shoppers will attempt to reduce expenses by seeking out cheaper items and discounts.

‘Worst is yet to come’

The chairman of Britain's largest grocery chain, John Allan, stated on Sunday to the BBC that "the worst is yet to come" regarding the increase in food prices.

On Thursday, the Bank of England increased interest rates for the first time since 2004, in an effort to control the rising inflation rate in the U.K.

The BOE Governor, Andrew Bailey, informed CNBC's Geoff Cutmore that the central bank is likely to increase interest rates again due to the expectation that inflation will reach approximately 7% in the spring, significantly exceeding its target of 2%.

After urging the public not to request large pay raises, Bailey faced criticism. He believed that doing so would contribute to the inflation rate becoming even more uncontrollable.

A Credit Suisse U.K. economist, Sonali Punhani, forecasted that the Bank of England will implement stricter monetary policy this year.

"Our previous forecast for the BoE to hike rates by 25 basis points in May 2022 may be sooner, as we now predict it could happen in March 2022," he stated in an email.

In the second half of 2022, inflation is predicted to decrease, potentially easing the pressure on the BoE to increase rates. Our assessment is that, although inflation will decline in H2 2022, additional monetary tightening is still necessary. We anticipate three additional rate hikes in 2022 and three hikes in 2023. We believe that the decrease in inflation will slow the hiking cycle, but not halt it entirely.

Energy crisis

From April, millions of households in the U.K. will see their annual energy bills increase by around £700 due to Ofgem, the energy sector regulator, raising the energy price cap by 54%.

The U.K.'s heavy dependence on natural gas as an energy source has made the country vulnerable to a gas shortage that caused wholesale gas prices to reach unprecedented levels in Europe last year.

On Thursday, Rishi Sunak, the British Finance Minister, declared that all residential electricity customers would receive a £200 loan to reduce their electricity bills by that amount, which they would repay in £40 installments over five years. Additionally, the majority of households would receive a £150 rebate on their council tax, a tax levied based on the value of their homes.

Numerous small business owners in Britain have expressed worry about their company's future due to rising costs.

Danielle McKenny, owner of West Midlands-based skincare company Gaea's Garden, stated in an emailed statement that the past two years have been devastating for small businesses as their sales have plummeted while the cost of living and eating has skyrocketed.

Jenny Blyth, the owner of Storm In A Teacup Gifts, expressed via email: "I'm scared for the first time in many years."

Rising living costs and increasing food and gas prices have made it difficult for me to maintain my usual sales levels. As a result, I am struggling to cover both my home heating expenses and business costs. I am faced with a difficult decision.

Jamie Rackham, founder of a Facebook group with over 182,000 small independent businesses, stated that many micro businesses were struggling to keep up.

The current climate is ideal, but the government is clueless and disconnected," he remarked. "As usual, only large corporations are thriving, while everyone else struggles.

The U.K. government is providing additional support to alleviate the cost of living pressures, including a £200 discount on bills this autumn and a £150 non-repayable reduction in Council Tax bills, in addition to the existing £12 billion of support already in place.

‘Impossible choices’

The Trussell Trust, a food bank charity, reported that the use of food banks rose in 2021, despite predictions that it would not improve as individuals face difficult choices due to the worsening cost of living crisis.

The Trussell Trust increased the number of food parcels given to those in need by 11% between April and September, providing at least three parcels every minute.

The social security system is under strain due to the 30-year high inflation, and essential costs are rising rapidly, according to Garry Lemon, policy director at the Trussell Trust, as stated in an email to CNBC.

The government must ensure that welfare payments align with the anticipated cost of living this April to prevent more people from seeking assistance at food banks. Our social security system must function as a lifeline.