Chancellor’s largesse must now be repaid

The trouble with borrowing is that there comes a point when the money must be repaid, says Peter Sha

The trouble with borrowing is that there comes a point when the money must be repaid, says Peter Sharkey. Picture: Getty Images - Credit: Getty Images/iStockphoto

The Chancellor could make swathing changes to pension tax relief in November, says finance expert Peter Sharkey.

As anyone who has ever borrowed money, whether in the form of a bank loan, a mortgage, or even from your kid brother would confirm, paying it back can sometimes be a nuisance.

I was reminded of this recently when reminiscing with a good friend who is heavily invested in buy-to-let property. I recalled the late eighties and early nineties when Bank of England base interest rates touched 15% and your correspondent was in the throes of building a property portfolio of his own. It was a tough time because given my then limited business track record, lenders were charging me between 1.5% and 2% over the base rate, which meant that on one mortgage I was paying 17% interest. Even thinking about it still hurts.

At times, I genuinely felt like one of those circus acts that frantically runs around in a prolonged, lung-busting effort to keep a series of fragile plates spinning atop very thin bamboo poles.

The trouble with borrowing is that there comes a point when the money must be repaid; unfortunately, it’s a distressing fact of commercial life that creditors usually want their cash at precisely the point at which you’re experiencing a cash-flow crisis.

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If they’re to survive, both individuals and businesses must meet these crises head-on, otherwise they’re doomed. Burying one’s head in the sand as creditor demands become increasingly frequent and loud is never the answer, although I have sympathy with those folks for whom debt can be overwhelming; fearing what the latest official-looking letter to drop through the letterbox contains must be particularly harrowing.

Even if he wanted, Chancellor Rishi Sunak cannot scan the piles of depressing financial analysis, gloomy economic reports and heartfelt cash demands from other government departments that litter his desk and declare he’s had enough for the day and is retiring to the pub.

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Politicians find it much easier when they’re splashing (our) cash rather than trying to balance the books in the aftermath of their largesse. Now it’s Mr Sunak’s turn.

In fairness, the Chancellor had no option but to provide furlough support for 9.6 million workers at an estimated cost of £80 billion. He distributed a further £67 billion in small business bailout loans, cut VAT from 20% to 5% which has helped the leisure industry, but cost the Treasury around £2.5 billion and most recently spent an estimated £500 million on the hugely popular Eat Out to Help Out initiative. In addition, Mr Sunak announced the suspension of Stamp Duty on (most) property sales which has driven prices higher but left the Treasury short of several billion pounds.

Now, as autumn nears and the furlough scheme enters its final stages while other emergency finance measures are wrapped up, it’s payback time.

Of course, Mr Sunak has the unique option of printing more money (aka quantitative easing) or actively encouraging inflation in other ways (money printing being inflationary) in order to reduce the colossal debt mountain and while he may revert to either option in due course, he must start making inroads and at least appear to be trying to balance the books.

According to a series of leaks that traditionally precede November’s Budget, it would seem that the Chancellor plans to start generating some additional money, around £20 billion annually, as soon as possible.

Of the proposals under review, aligning capital gains tax with income tax could affect an army of buy-to-let investors. Meanwhile, unless it’s absolutely sky-high, an online sales tax will do nothing to prevent the inexorable growth of internet shopping, but the proposal most likely to hit most people (and hard) is the suggested slashing of pension tax relief.

Reducing the highest rate tax relief of 40% is an easy one for Mr Sunak to justify. The top rate applies to higher earners (and higher tax payers) and everyone else only gets 20% relief; this presents the Chancellor with an opportunity to rectify this apparent ‘anomaly’ and save around £10 billion a year to boot.

Some four million taxpayers would lose out if relief is cut, effectively increasing their average tax rate because relief is paid on pension contributions at the same rate of income tax they pay. Many savers will wonder if they have time to add to their pension pots before tax relief is cut; the answer is ‘probably, but not very long at all’.

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