that is that the current proposal on repayments over time is that they will not commence until 2025 so there is a four year inflation factor to add in before repayments even start.
The stark effect of the true future value of money is illustrated in the table below :
Debt replacement and the future value of money Year
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
£ Value 12,000
11,520 11,059 10,617 10,192 9,784 9,393 9,017 8,657 8,310 7,978 7,659 7,353 7,058 6,776
True Cost 12,000
£ Repaid 12,000
the £12,000 over ten years commencing in 2025 is only £8,195.
There will be a significant benefit to the Treasury the more people who decide to pay the debt early, if investment returns exceed 4% per annum, as the increase in actual value of the investment pot will more than offset the fall in the true value of money.
£ Repay (over time)
978 939 901 865 831 797 766 735 706 677
8,195
So the true cost of deciding to repay the debt immediately is £12,000 whilst that of a decision to pay
There is a strong argument, which appears to have fallen on deaf ears, that the early payers should be encouraged to pay early by offering a discount to the debt owed. Failing such an incentive then anyone considering early repayment may be considered foolish to do so. On the other hand, the alternative would be to charge interest on the outstanding debt of those choosing to pay over time. There is then an incentive to pay early to save on the interest charged.
Many taxpayers will take the view that, being in a happy position to clear the tax debt, they will do so at the earliest opportunity to avoid the “millstone round the neck”. To the older generation, in retirement or nearing it, I would perhaps encourage them in this view. But to the younger generation, in stable employment and with an alternate use of the money, such as paying down the mortgage, and absent of any offer of a discounted payment or an interest charge saving, then the obvious choice is... TAKE THE TEN YEAR OPTION.
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Beyond 20/20 - Finance Page 33
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