How to beat the income squeeze

To add to the misery, mortgage, telecom and broadband costs are also rising. As from May, Halifax, Clydesdale and Yorkshire banks will raise mortgage interest rates for 1m households, while at some time between June and September Bank of Ireland will raise rates for 200,000 borrowers.

Meanwhile, some 3m Virgin Media customers will see broadband and call charges increase next month, while water bills are also going up — rising 5.7%.

Figures due out this week are expected to show annual inflation continuing to ease, but the Consumer Prices Index measure of inflation for February is still expected to be 3.3% — considerably more than the Bank of England’s target of 2%.

George Osborne, the chancellor, could provide a boost for families in his budget this week by accelerating plans to raise the personal income tax allowance. It is already set to go up from £7,475 to £8,105 in April, and to £10,000 by 2015. From next January, though, households with a higher-rate taxpayer will lose child benefit, which is paid for each child until they hit 18. It is worth £1,055 a year for the first child and £697 for subsequent children. The Institute for Fiscal Studies says the typical family will end the year £160 worse off.

Cut borrowing costs

Stephen and Clare Miles remortgaged to cut monthly repayments by £175 (Adrian Sherratt )

The biggest savings can be made on your mortgage. More than 5m homeowners are on standard variable rates (SVR), to which they revert at the end of a deal. The average SVR is 4.83%, but someone with a £200,000 mortgage can save £2,959 a year by switching from the SVR to the best-buy lifetime tracker from HSBC at 1.89 points above Bank rate, or 2.39%. It is available for a fee of £999 to those with 40% deposits.

Other borrowing costs, such as those of credit cards and loans, can also be cut by switching. The average five-year loan for £10,000 is charged at 12.19%, according to data from comparison site moneysupermarket.com, but switching to a 6% deal from Marks & Spencer produces a monthly £28 saving — £336 a year.

If you also have a credit card debt of, say, £2,000, on which you typically pay 17.32%, you pay £302 a year in interest if you make only the minimum repayments. This could be eliminated by transferring the debt to the Barclaycard Platinum extended balance transfer card, which offers 0% on transferred balances for 22 months. It has 2.9% of the balance transferred as a fee — in this case £58 — a total saving of £244.

Saving: £3,539

Case study: Saying no saves a packet
Clare Miles, 32, an accountant from Marden, Herefordshire, and her husband, Stephen, 35, a production manager, left Chelsea building society after coming to the end of a five-year fix at 6%. They were about to be switched automatically to Chelsea’s standard variable rate of 5.79%. However, they found a five-year fix at 3.79% from Accord through London & Country Mortgages. The couple, pictured with son Archie, 3, have seen their repayments fall £194 to £932. If they had moved to the SVR, they would be paying £175 more.

Don’t bank on loyalty

Savers are at risk of a sharp fall in returns when bonus rates on their instant access accounts expire, typically after 12 months. The average bonus is currently 1.37%, according to Moneysupermarket, after which most accounts pay only 0.5%.

If you had £25,000 in an easy-access savings account that has dropped to only 0.5% in a year, you would earn interest of £125. But transferring to the Coventry building society’s Online Saver, which pays 3.15%, would earn you £788 — £663 more.

It isn’t only savers who are penalised for loyalty. Energy customers who do not switch could be paying a lot more than they should.

Some 60% of energy customers have never switched supplier, according to Ofgem, the regulator. The average energy bill is £1,251, but by switching to First Utility’s iSave v10 scheme, an online-only, monthly direct-debit deal costing £1,027 annually, you save £224 a year. Providers of home and motor insurance also boost profits by charging loyal customers more. The typical annual saving in home insurance, using a comparison site, is £127, while the typical car insurance saving is £372 — a total of £499.

Saving: £1,386

Boost cashback

Make sure you check cashback sites before switching household bills. For example, you can earn an extra £40 by switching to First Utility via the Quidco cashback website.

You can make further savings by shopping with a cashback credit card such as the Capital One World Mastercard, which has no annual fee and pays 5% cashback for the first three months, capped at £100. After that you get 0.5% for further spending up to £5,999; 1% cashback on spending between £6,000 and £9,999; and 1.25% on any spending above this.

If you spend £1,000 a month for a year, you earn £160 cashback.

Saving: £200

Ditch the car

Families living in city centres could save thousands of pounds by ditching the runaround and using a car club instead. The clubs allow you to use a car on a pay-as-you-go basis. Instead of having to pay for fuel, car tax and insurance, you simply pay a membership fee, then for the amount of time you use the vehicle. You must book a car in advance, collect it and return it to a designated location.

The number of car club members grew from 32,000 in December 2007 to 160,000 now, according to Carplus, a car club industry representative.

There are four main UK car clubs, of which Zipcar is the largest, covering London, Oxford, Cambridge, Bristol and Maidstone.

You pay an annual membership fee of £59.50, then £5 per hour of vehicle use. The first 40 miles are included, but beyond that an additional per-mile charge of 29p applies.

Car clubs are viable only if you drive fewer than 7,000 miles a year, beyond which the per-mile charge and hourly rate offset the savings. In practical terms, it is equivalent to commuting 10 miles every day, 20 miles each weekend, and doing an additional 700 miles a year — when going on holiday, for example.

A 45-year-old man with nine years of no-claims, driving a Volkswagen Polo for 1,500 miles would pay £3,542 over 12 months. This includes the cost of insurance, road tax, fuel and the car’s depreciation.

Using Zipcar, the cost is £1,515 — a saving of £2,027. If you drive 5,000 miles, the saving falls to just £695. However, drive 15,000 miles in a year and it becomes £8,471 cheaper to use your own car.

Saving: £2,027

Case study:
Stephanie Morgenstern, 53, a PR officer from East Sheen, London, has used a car club for five years, saving about £1,000 a year. She and daughter Lara, 14, also use hire cars or taxis from time to time.

Cut home services

You can save hundreds of pounds by reviewing your television, broadband and phone bills, giving up premium TV channels and ditching your landline and using your mobile phone instead.

For example, one of the cheapest deals for TV, phone and broadband, is with Sky. It costs £20 a month plus line rental of £12.25 — a total of £32.25. This gives you 282 channels, free evening and weekend calls to landlines, and broadband with a 2GB download limit. Premium content,including Sky Movies, which gives access to hundreds of films, costs £16 extra and takes the monthly bill to £55.75. However, you can watch many free-to-air channels, including the usual BBC and ITV fare, without having to pay a monthly subscription, providing your TV receives digital signals (new sets all do) or you have a Freeview receiver.

Although most providers require you to have a landline for their broadband service, Virgin Media offers a 10MB broadband-only service for £22.50, which allows unlimited downloads. You don’t have to pay a monthly fee to watch films online, as You Tube introduced a rental service last year (youtube.com/movies).

It costs £3.49 to rent new releases (£4.49 for high-definition), and £2.49 for older titles. Users have 30 days to watch the film online, and 48 hours to finish watching it once started. Over a year you save £399 compared with the Sky package.

For a wider selection of films, providers such as Netflix and Lovefilm allow users to watch films online for a monthly fee of £5.99 and £4.99 respectively.

Saving: £399