Pay tax by credit card: Fantastic news… for some

The Good news

When I first read this, as a system player, my initial personal instincts were ‘fantastic’. For those of us who are self-employed the tax bill is the biggest lump sum payment of the year. Thus, to bring this into the MoneySaving fold enables you to do two things:

• Stooze. If you can pay for all your tax on a 0% card, this is a great way to stooze (make free cash from credit cards). As rather than utilizing balance transfer cards, which have a fee, you can use the top 0% for purchases cards which don’t. While using cards that you spend on to stooze has a lower fee, normally it takes time to build the spending up on the card; yet with a tax payment it could be done instantly (read the Stoozing article which will explain all this, if you don’t understand it).
• Make serious cashback. Currently the two best cashback cards on the market pay four or five percent cashback in the first few months that you have them. So, if you time the application to just before you need to make your tax payment this could be a real bonanza. Ie. If your tax bill is £10,000 you could get £400 back!

There are two things that may hamper this when we see further details. Firstly, it’s likely that people who pay by credit card will have to pay the ‘merchant fee’; the extra amount the revenue must pay for processing it by card. This will probably be around 1% of the sum – yet while this diminishes the gain, it won’t hurt it too much.

The other one is more damaging; it is possible credit card companies could count this is a ‘cash withdrawal’ in which case it’s a nightmare as it won’t be at zero percent and even if you pay the card off in full you’d pay interest on it. We need to watch out for that one, as it’d be a scandalous disgrace if it happened.

The Bad News

The worry of course is this encourages people not to put money aside to pay for tax, knowing that they can put it on a credit card. Yet for me, this is tempered by the fact that currently people who do this use a loan, and the best credit cards are cheaper than the best loans, so if someone is in this position – and does their research – it can be cheaper. Having said that, we need to ensure we don’t encourage borrowing to pay for tax.

My view is simple – for every £100 you earn roughly £33 of it isn’t your money, it belongs to the revenue to pay tax and National Insurance (and it’s more if you’re a higher-rate taxpayer). So as soon as you earn this, put it away in a top savings account specifically for tax (or if you’re using the free budget planner you’ll see a special category for it there). Then you never see this money (though it does earn you interest) and you don’t feel it’s yours – which of course in the long run, it isn’t.

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