Month: April 2021

At the beginning of March Chancellor Rishi Sunak presented his Budget. His aim: to chart a course out of the economic damage wrought by the pandemic. A year earlier he had said he would do “whatever it takes” to protect jobs and businesses. Twelve months on, with Government borrowing breaking all records, it is clear that it will take a very long time to pay the bill for “whatever it takes.”

One of the key measures in the Budget was the freezing of personal allowances: the higher 40% rate will be frozen at £50,270 from April 2021 to the 2025/26 tax year. This means that 5m people in the UK – roughly one in six taxpayers – will be paying higher rate tax by 2026 as wages rise with inflation. As many commentators pointed out, it looks like middle class savers will be paying the bill for the pandemic.

Is there any way to avoid this? Good news! – The answer is ‘yes.’ Putting more money into your pension will help you save for the future and avoid an increasing tax bill. This is because pension contributions attract tax relief at the same rate you pay income tax, meaning savers could effectively eliminate higher-rate tax bills by saving anything above £50,270 into their pensions.

Under the proposed tax freeze, someone now earning £49,000 whose pay rises by 3% per year will see their annual tax bill increase by £3,128 by 2026. However, if they put £500 per month into their pension, their tax bill will be just an extra £609 – despite them earning an extra £7,804 by the end of the Chancellor’s freeze.

What the freeze on thresholds – which also sees the basic rate threshold frozen at £12,570 – very clearly illustrates is the need for financial planning. This is not the place for complicated examples, but what is clear is that many people will enjoy significant pay rises over the next five years and will – without adequate financial planning advice – end up paying significantly more in tax.

It is worth pointing out that the freeze on thresholds also applies to inheritance tax, with that threshold frozen at £325,000. Many people will find themselves paying significantly more tax on their earnings and – without proper planning – seeing the value of their parents’ estates reduced by inheritance tax.

The Daily Telegraph described the tax rises in the Budget as ‘eye-watering,’ commenting that they take the UK back to levels of taxation not seen since the sixties. What’s clear is that the Chancellor’s decision to freeze thresholds to pay part of the bill for the pandemic makes long-term financial planning more important than it has ever been.

Once upon a time we bartered; we exchanged animal skins for meat and sold our labour for a square meal. Then, gradually, coins and paper money arrived. Banks became secure. We wrote cheques. We had a credit card in our pocket as the ads encouraged us ‘to take the waiting out of wanting.’

Debit cards arrived. The use of cash, significantly aided by the pandemic, started to dwindle. Most of us spent 2020 simply tapping our mobile phones if we wanted to pay for something.

But could even that technology soon be outdated? Is the next great payment ‘leap forward’ on the horizon? Is paying for something going to be easier and more convenient than we could ever have imagined? Or will it herald a leap forward for Big Brother as we start to pay for things not with our phones, or with our bank cards, but with our face…

All we would need to do is present our face in front of a scanner. If we needed to, we could even add a tip simply by waving our hand.

Science fiction? Years in the future?

No, millions around the world are already using the technology. The experts say that paying with our face won’t just be easy and convenient – it will also be inevitable.

As you might expect, the biggest advances are being made in the Far East. In China 98% of mobile payments go through Alipay, jointly owned by Alibaba and WeChat Pay. The two companies are now competing with each other in the facial recognition market.

Millions are being committed to the research, with Chinese state media suggesting that 760m people could be using facial recognition by next year.

On the West Coast of America, PopID is following a similar route. You sign up on the website, upload a photo of your face and then link the account to your bank card. Your photo is stored in the cloud, with the app already being used in restaurants and cafés in major cities.

PopID’s CEO John Miller says that using your face is no different to using your phone. “It’s just another way to identify yourself. The picture taken at point of sale is destroyed immediately.” Therefore, he argues, it is less intrusive than paying with your phone, which can track your movements via GPS.

There will, though, be inevitable privacy concerns. As the stories coming out of China testify, not every use of facial recognition is necessarily benign.

…And there could be another problem. Supposing you finally decide to do something about those bags under your eyes? Your double chin? Could our payments be declined because we suddenly look ten years younger? “I’m sorry, sir, your payment has been declined. Your face doesn’t fit…”

In February, Elon Musk, the world’s richest man and boss of carmaker Tesla, announced that his firm had bought $1.5bn (£1.1bn) of the cryptocurrency Bitcoin and expects to start accepting it as payment in the future.

The announcement caused the price of Bitcoin to jump to $44,220 (£32,072) – a rise of 17% and a record high.

By any standards Bitcoin has richly rewarded those people who hold it: the cryptocurrency closed December 2019 at £5,400. In round figures it has risen six times in little more than a year, and at the time of writing has just broken through the $50,000 (£36,020) barrier.

But what is Bitcoin? What is a cryptocurrency? And could the fact that the world’s most valuable car company is now accepting it as payment mean that we’re well on the way to seeing the end of cash?

So what is a cryptocurrency? It is a digital asset designed to work as a medium of exchange (like ‘real’ money), but it is not controlled by a central bank, and does not exist in physical form. There are no ‘Bitcoin notes’ and never will be. Records of ownership are stored digitally, using the strongest possible cryptography to secure ownership and transaction records.

There are several cryptocurrencies in existence, with Bitcoin far and away the most well-known. It was invented in 2008 and has been in use since 2009. There are now more than 100m Bitcoin wallets being used, with estimates that around 10% of Americans hold a wallet.

Bitcoin has plenty of critics, not least for the amount of electricity needed to produce it – in 2018 it was estimated that more energy was used in Iceland in ‘mining’ (creating) Bitcoin than was used by the entire Icelandic population to power their homes. It has also been derided as a ‘bubble’ that is bound to burst, and there are claims that it is used for money laundering and other illegal purposes.

What seems inevitable though, is that there will eventually be some form of widely accepted digital currency. Does this, therefore, mean that the days of cash are numbered?

The logical answer to that seems to be ‘very possibly.’ The great advantage of a digital currency – if you are the Chancellor of the Exchequer – is that transactions can be tracked. Paying your plumber in cash to save the VAT would simply not be possible with a digital currency. China is well on the way to becoming the first cashless society. Thousands of businesses in Sweden do not accept cash. And we have all used far less cash during the Covid-19 crisis.

Yet cash remains essential for many people: the elderly, those living in remote areas and those with poor credit histories who cannot get bank accounts, have all been cited as examples of people who need cash.

Cryptocurrencies, though, are only increasing in popularity. It is going to be an interesting struggle…