Peter Mandelson has announced a package of measures to end the business loan famine and get banks lending again. It involves giving the big High Street lenders more taxpayers’ money – this time up to £20 billion to guarantee up to 50% of the value of any loans advanced to small and medium sized businesses. This could insure the banks against half the risk of companies defaulting on the loans.

Will this be enough to get banks lending again? It remains to be seen. And where do you go to actually get such a loan? Here too details are presently sketchy, with the government announcement (see below for full text) referring you to the banks. But at least the government is now on the case.

Business Link page where more details should get posted over the next few days

Guardian story
Mandelson unveils £20bn plan to free up credit for businesses

Financial Times
Complex concoction gets mixed response

The Scotsman
Taxpayers to fund ‘safety net’ for banks as firms offered £10bn of loans

Text of Government announcement below

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If you have a low income it is possible you have lost out by the abolition of the 10p starter rate of income tax. So the current row about recent changes may affect you. But how?

According to the respected and non-partisan think tank the Institute for Fiscal Studies (IFS)

The impact of Mr Brown’s income tax changes on an individual taxpayer goes as follows: last year people under 65 paid no income tax on the first £5,225 they earned, 10% on the next £2,230, and 22% on the next £32,370; this year they will pay nothing on the first £5,435 and 20% on the next £36,000.

Taken in isolation, this means that people on incomes between £5,435 and £19,355 this year would be worse off, because they lose more from the abolition of the starting rate than they gain from the cut in the basic rate. The loss is greatest at £232 a year for someone earning £7,755.

Most people on incomes between £19,355 and around £40,000 would gain noticeably from the reform, with the biggest gain of £337 a year at £36,140.

However, that is not the end of the matter. Gordan Brown simultaneously made changes to tax allowances, Child Tax Credit and Working Tax Credit that go a long way to compensate people on lower incomes who have lost out – or they would if people claim everything they are entitled to.

So taking the whole budget package into account, and assuming everyone goes through the rigmarole and claims means-tested tax credits, how does the picture change?

The IFS again:

Roughly one family in five loses; two in five gain and the rest are unaffected.

Most of the losers are of two sorts. First, childless single people who do not qualify for the working tax credit because they [...] work less than 30 hours a week, or earn too much.

Second, childless couples who lose twice from the income tax changes, but gain at most once from the working tax credit because it is a family payment rather than an individual one.

Another vocal category of loser is early retirees, who do not receive tax credits, but who are too young to benefit from the increase in the tax allowance for those aged 65 and over.

The IFS goes on to make various recommendations about how the policy can be changed at this late hour. Some concessions are likely with local elections coming up and a revolt of Labour MPs in the offing. But the moment it is too early to say exactly what the final outcome will be.

One fact though is clear. The way the tax system is changing it is becoming increasingly important for people in work to claim things like Working Tax Credit and Child Tax Credit. Far from being welfare benefits separate to the tax system, the government is increasingly making them part of normal taxation. If you don’t claim you are in effect paying tax at the wrong rate, and losing money.

LATEST from BBC on 10p tax rate row

Full IFS article on abolition of the 10p starting rate

PRIME guide to how to claim Working Tax Credit

Neat tax calculator to check roughly what you pay

From October 2008, a new benefit called the Employment and Support Allowance (ESA) will start replacing Incapacity Benefit and Income Support for those unable to work due to a disability or long-term illness. The new system will apply to new claims from 27 October 2008. Those with existing claims accepted before that date will continue to be paid on the existing system for another two years.

At the moment you can apply for Incapacity Benefit or Income Support, or sometimes both under a confused system that will eventually be completely scrapped.

At the heart of the new system is a new medical test, the Work Capability Assessment, designed “to look at what people can do rather than what they cannot” according to the government press release.

ESA claimants will be split into two groups based on the results of the test: those judged able to take part in some form of work and those who can’t. The amount of money you receive and the sort of training, if any, offered depend on which group you fall into. Meanwhile Jobseekers Allowance will continue to be available for those without health problems who quailify.

These changes are all part of the 2007 Welfare Reform Act, which is only now becoming law as the relevant provisions are enacted. You can read the detailed regulations passed at the end of March here.

There is a good discussion on BBC Moneybox on how these might affect real claimants.

The new system has had little detailed coverage in the press, with most media outlets ignoring it or treating it as an opportunity to comment on benefit fraud. However, the whole welfare reform process has been dragging on for some time. Many of these changes were announced last year by then Work and Pensions secretary Peter Hain, prior to his resignation in a scandal over alleged failure to properly declare over £100,000 in political contributions.

Official DWP page

Get tough tests face the sick on benefit

Is Labour abolishing illness?

Owners of small businesses selling all or part of their business will only pay capital gains tax at 10 per cent. Months of speculation about changes to Capital Gains Tax were finally clarified in the Chancellor’s 12th of March 2008 budget report.

The 10 per cent rate applies only to the first £1 million of assets sold during a person’s lifetime. This so-called “Entrepreneur’s Relief” is a response to criticism of the original proposals.

These would have treated people selling small businesses they had laboriously built up themselves in the same way as big private equity firms that just buy and sell assets – hitting both with the same high rate

Tax expert Penny Bates comments on the BBC site

More about tax and disposing of a business at the HMRC site

In other budget news, the Small Firms Loan Guarantee scheme will get extra funding to encourage the banks to lend small businesses they might otherwise consider too risky. And a new capital fund will be set up to encourage female entrepreneurs to grow their businesses.

Other measures are promised to make it easier for small firms to bid for public sector contracts.