Clampdown on payday lenders

The government has announced that payday lenders and other providers of short-term credit will face much tougher regulation when a new watchdog body, the Financial Conduct Authority, starts work next year.

Ministers have promised that payday lenders will face more rigorous checks before they can set up in business and there will be more resources devoted to investigating their tactics once they start lending.

If customers are ripped off, the FCA will have the power to impose unlimited fines - compared with the maximum penalty of £50,000 which the Office of Fair Trading can impose at the moment.

The announcement came with the publication of the Financial Services Bill, which confirms that the new FCA will take over responsibility for policing consumer credit.

The FCA also assumes the consumer protection role of the current Financial Services Authority, charged with trying to make sure that scandals such as pension, endowment and PPI mis-selling don't happen in future.

Is it illegal to pay in cash?

The nation's top tax collector, Dave Hartnett, has said, "Every time someone pays cash in order not to pay VAT, the nation gets diddled."

In a Telegraph interview he's reported to have laid down that householders have a duty to ensure that other people do not evade paying their share of tax.

Plainly the remarks are directed against builders and other traders who ask for cash so that they can avoid VAT and income tax, which is wrong.

But some people might be worried that they are actually breaking the law if they pay in cash.

Just to clear this up, I checked with HMRC, the tax office, and they say, "it's up to you whether you pay by cash or cheque."

Also: "it's entirely the responsibility of the trader to declare the income they receive".

So it's fine pay in cash if you want to.

Incidentally, the UK has the highest threshold for VAT-registration in Europe. Businesses don't have to start charging it until they are taking in £73,000 a year.

It's quite possible that a small trader will not be required to put VAT on your bill.

Hester's £500,000 tax bill

Obviously, Stephen Hester will have to pay tax on his £963,000 bonus from RBS, but how much?

The bonus is in shares, but it is still liable for income tax, payable when the shares are handed over in 2013 and 2014.

So Hester is likely to have to pay 52% tax on the value at that time, made up of 50% income tax and 2% National Insurance.

Assuming the value will still be around £963,000, the tax charge will be £500,760.

He has to hold on to the shares for a period. Then, if he sells them, he is liable for Capital Gains Tax on any gain in value since the shares were handed over.

The CGT rate would be 28%.

£379 saving from £10,000 allowance

A basic rate taxpayer would save £379 a year from an early move to Nick Clegg's £10,000 personal allowance - the amount you can earn before income tax kicks in. 

That's £31.58 a month or £7.29 a week.

In addition, of course, those with incomes under £10,000 wouldn't have to pay income tax at all.

Here's a table, kindly supplied by the tax experts at the CIOT, which shows how the calculation is done.

Year	Personal allowance	Amount saved by basic rate taxpayer compared to previous	Amount saved by basic rate taxpayer compared to 2010-11
2010-11	£6475
2011-12	£7475	200	200
2012-13	£8105	126	326
??	£10000	379	705

Courtesy of the Chartered Institute of Taxation

Clegg's £10,000 personal allowance

What would it cost to bring in a £10,000 personal tax allowance in 2013-14?

It could be over £8bn.

(I'm leaving on one side the possibility of applying it from April 2012, though that is technically possible.)

The Institute for Fiscal Studies said bringing in the £10,000 threshold for tax from 2015 would have cost £4.1bn on top of the normal inflation increases in the allowances which would kick in over the years up until then.

The back of the envelope calculation from the IFS today is that the cost of early implementation could be double that.

The original calculation assumed that higher rate taxpayers would only be allowed to gain as much as standard rate taxpayers. (Just pushing up their personal allowance and not making any other changes would give them twice the gain.)

On the other hand, removing all potential benefit for higher rate taxpayers would take a billion off the 2015 cost, so perhaps £2bn off the 2013 cost.

The Chancellor has form with this tactic, having fiddled with the threshold for higher rate tax to make sure those in the 40% bracket didn't cash in unfairly on previous increases in the personal allowance.

The IFS says that 500,000 more people could be brought into higher rate tax if the £10,000 allowance was brought in with no benefit going to the better off.

Another quirk of this reform is that it cuts across the Chancellor's plan to remove Child Benefit from families with higher rate taxpayers.

Any family with a taxpayer drawn into the 40% bracket as a result of the £10,000 allowance would lose the benefit, saving the Treasury £200m a year -- according to the IFS.

Of course, how George Osborne would manage an early introduction of the £10,000 allowance remains a mystery.

We'll only find out whether he'll do it, when - and how he'll pay for it -- in the Budget.

Is there a jump in debt?

How can family unsecured debts be up 48%, when banks say families are battening down the hatches, paying down debt and running down savings?

The 48% comes from Aviva, who's latest Family Finances Report says that the typical family's debt, excluding mortgages, has increased from £5,360  in January 2011 to £7,944 in January 2012.

Against that the British Bankers Association says that unsecured lending - credit cards, personal loans and overdrafts - contracted by 1.4% in 2011. And customers used what cash they had to pay down debt and cover essential spending.

The thing is - both findings can be right.

Bank customers are being careful, yes. That what happens after recessions.

But families have other commitments: energy bills, phone bills, council tax, food and so on. These have either been rising or become a heavy burden.

Some families are in the red with the gas and electricity supplier, the mobile phone company, the council or family and friends - and those debts might be increasing.

They might turn to a payday lender to tide them over the month, a method of borrowing which can mount up very quickly.

None of this shows in the BBA's totals, but it certainly feels like debt if you have it.

Dangers of axing Child Benefit

Anyone who wants to understand the implications of the government's plan to axe Child Benefit for higher rate taxpayers should read this note from the Low Income Tax Reform Group (plus read my previous note here).

It points out the "huge administrative complexity" involved in introducing a tapering system to prevent families suddenly losing thousands of pounds after a small increase in income takes them over the higher rate threshold.

It warns that "independent taxation could become a thing of the past" because the benefit claimant, usually the mother, could have to be assessed alongside a partner paying 40p tax.

It says the new system could become a "tax on marriage" because a single mother would have to think twice before starting a relationship with a higher rate taxpayer.

And it warns of the danger of having to claw back overpayments of Child Benefit because it may only become clear that a family has a higher rate taxpayer after months have gone by.

Now that the higher rate threshold is being reduced to pay for increases in the personal allowance, many taxpayers have no idea that they are joining the 40% club.

Softening the Child Benefit blow

The Prime Minster hints today that the Budget will contain measures to soften the impact of axing Child Benefit for families with an earner in the Higher Rate tax bracket.

So how could that possibly work?

Child Benefit is a universal, untaxed payment: every mother with children gets it if she applies, and the tax office doesn't need to know.

The plan is to deprive families of the benefit if one partner earns more than £42,475, next year's higher rate threshold, saving £2.5bn a year.

As many have pointed out, the change would create two major problems...

1. The Cliff-Edge effect. Stray a few pounds into the 40p tax bracket and a family with two children would lose more than £1,750. Ouch! Promotions and pay rises will lose them money.

2. The One Main Earner problem. If one earner brings in more than £42,475, the benefit is removed. Two earners, with £40,000 each and £80,000 combined, will still get it. The richer household gets Child Benefit, the poorer one doesn't.

The Prime Minister's line that "we always said we would look at the steepness of the curve" suggests that the government is thinking of some sort of tapering mechanism to turn the cliff-edge into a gentler slope.

They could lay down that for every £10 of earnings over the threshold, £1 of benefit would be lost - or something like that

The danger of this is that family income would have to be constantly reassessed in relation to Child Benefit, because incomes tend to fluctuate.

It's just what happens with tax credits. We all know what a bureaucratic tangle that has been.

A tactic to deal with the One Main Earner problem could be to add up the two partners' earnings, then remove Child Benefit when the aggregated amount goes over a threshold, such as the starting point for 40p tax.

Again, that's what they do to assess tax credits and it's very complicated. It's means testing and the tax officer is shooting at a moving target.

The beauty of Child Benefit is that it is so simple: there's minimal administration required and nearly everyone who could get it, does get it. There is one form to fill in to apply.

Tax accountants have described the implementation of this policy and the possible permutations as nightmarish.

Many of them favoured the straightforward inclusion of Child Benefit in taxable earnings. But even this tactic would be hard to police.

Taxpayers would have to own up to receiving the benefit. Many men would find themselves paying tax on money being paid directly to a wife or partner. Millionaires would still qualify for 50% of their benefit. And the Exchequer would gain less.

In any case, for the Chancellor to switch to such an alternative policy would look like an embarrassing U-turn.

The goose is 52% plucked

Who wants the rich to be paid so much? The standard answer in the past few days has been: if they don't deserve it, they shouldn't get it.

Another point to remember in this debate, though, is: if they're paid so much, what's the best way for the state to get it off them?

"The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing," said Louis XIV's finance minister, Jean-Baptist Colbert.

And he tried pretty hard, back in the 17th Century, to impose taxes on undeserving nobles who avoided tax. The poor paid tax while the rich got off scot-free.

So, before you consider how best to pluck the goose, think how different forms of pay to high-fliers might be taxed.

1. At zero per cent, if they scarper overseas.

2. At 26% corporation tax, if the employer doesn't pay a salary directly and declares the money as company profit.

3. At 28% capital gains tax, if the high-flier arranges to get share options instead of pay - and cashes them in later.

4. At 52% income tax and National Insurance for pay and bonuses over £150,000.

Leaving aside, for a moment, the argument over who deserves what - it's clear which of these options the goose-plucker would go for.

4 million risk tax fines

Her Majesty's Revenue & Customs is warning that taxpayers who submit their self-assessment forms late could be fined as much as £1,600 if they continue to withhold the information.

4 million taxpayers, who still have to send in their online 2010-11 forms by 31st January, have been sent reminders.

Tax officers are concerned they may not have realised that a much more draconian system of fines applies this time around.

To add to the longstanding fixed penalty of £100 for late filing, fines of £10 a day kick in after three months, up to a maximum of £900.

A further £300 can be levied after 6 months and another £300 after twelve months, adding up to a potential £1,600 in fines.

That's a high price for taxpayers who can't be bothered to send in a form or hold back deliberately.

When the Revenue introduced the new system of fines last year, it said it took a disproportionate amount of time and effort to deal with a hard-core of late payers.

Shell closing pension scheme

Shell UK is to close its £13bn final salary pension scheme to new joiners.

It is believed to be the last of the UK's top 100 publicly listed companies to pull out of offering gold-plated final salary pensions to new recruits.

Final salary schemes promise a guaranteed proportion of salary to members on retirement, depending on the number of years worked.

As employers look to cut costs, 90% of the schemes have been closed to new members, according to research from the Association of Consulting Actuaries.

From early 2013 new staff at Shell will be offered membership of a scheme without a guaranteed level of pension.

Existing members of the Shell scheme will be allowed to continue contributing and building up their salary-linked pensions.

The National Association of Pension Funds says that nearly a quarter of private sector final salary schemes are now closed to both new joiners and further contributions from existing members.

How families will lose £1,250 a year

Tax and benefit blows, plus some gains, which the Family & Parenting Institute and IFS say will result in families with children suffering a £1,250 annual loss by 2015.

The key tax and benefit measures affecting families with children that have already been implemented are as follows:

*The income tax personal allowance increased by £1,000 in cash terms for the 2011–12 tax year;
*Increases in all National Insurance rates and increases in the thresholds at which employees’ and employers’ National Insurance start to be paid;
*An increase in the standard rate of VAT to 20%;
*Cuts to tax credits; in particular a three-year freeze in the basic and 30-hour elements of the Working Tax Credit, an increase in the rate at which tax credits are withdrawn as income rises, the abolition of the baby element of the Child Tax Credit and the withdrawal of the family element of the Child Tax Credit from £40,000 rather than £50,000. These are partly offset by an increase in the child element of the Child Tax Credit;
*Reductions in the maximum amounts of rent that can be claimed in Local Housing Allowance;
*A three-year freeze in Child Benefit rates;
*and The use of the Consumer Prices Index (CPI) to index benefit amounts each year rather than the Retail Price Index (RPI) or Rossi index.

Those to be introduced in 2012–13 include:

*A further increase in the income tax personal allowance above normal indexation;
*Reductions in contracted-out rebates in National Insurance;
*A further lowering of the point at which the family element of the Child Tax Credit starts to be withdrawn
*An increase in the number of hours couples with children need to work to be eligible for the Working Tax Credit from 16 to 24;
*Changes to the way in which tax credit awards are recalculated when a family’s income changes during the year which make the system less generous to such families;
*The withdrawal of child benefit from families containing a higher-rate taxpayer from January 2013;
and Time-limiting contributory Employment and Support Allowance for those in the Work-Related Activity Group.

The tax and benefit changes to be introduced in 2013–14 or 2014–15 that affect families with children include:

*The localisation of Council Tax Benefit accompanied by a 10% fall in expenditure.
*A medical reassessment of Disability Living Allowance claimants that is forecast to reduce the caseload by 20%.
*existing claimants of benefits and tax credits will start to be transferred to Universal Credit from April 2014.