The Government is considering a new tax on the UK’s payday lenders. The move is designed to address a funding shortfall for the unit that tackles illegal lending.

The Illegal Money Lending Team, based at Birmingham City Council, has helped borrowers throughout the UK recover funds from loan sharks since it was launched in 2004. Richard Burden, the Labour MP for Birmingham Northfield, raised the issue of cuts to its funding at Prime Minister’s Questions in December 2015, and received a reply suggesting that short-term lenders may be asked to foot the bill in future.

Mr Burden asked:

“Why are you choosing now to cut the budget of the Birmingham-based England Illegal Money Team by a third when they’ve helped 24,000 loan shark victims to get £63 million of illegal debts written off?”

Chancellor of the Exchequer George Osborne MP, who was standing in for the Prime Minister on the day in question, told the House of Commons in reply:

“We take very seriously illegal loan sharks and excessive interest charges on payday lending – which is why it was Conservatives who introduced the first ever cap on payday lending.”

[With regards to] the funding for illegal money laundering and loan shark teams we are looking now at a levy on the industry to meet the funding requirement.”

Russell Hamblin-Boone, Chief Executive of the Consumer Finance Association, a trade association that counts some of the UK’s largest payday lenders amongst its membership, suggested that any such tax would be unfair on payday lenders, and would actually result in more customers falling victim to loan sharks.

In a press release issued by the Association, Mr Hamblin-Boone commented:

“The Chancellor is wrong to conflate illegal money lenders with legitimate, regulated payday lenders. All credit providers have an obligation to tackle illegal lending so any levy to fund the important work by the Illegal Money Lending Team should apply across the entire consumer credit industry. To tax payday lenders alone is completely unjustified and will be wholly ineffective as short-term credit now accounts for less than 1% of unsecured personal borrowing and lending has decreased by more than 70% under FCA regulation. Further restrictions on access to legitimate short-term loans will drive even more people into the arms of the very loan sharks that the Government is seeking to tackle.”

The Labour manifesto for the 2015 election also proposed a tax on payday lenders, but in this case the funds would have been used to fund alternative sources of credit, such as credit unions.

The Conservative-led coalition government introduced a number of cost caps on payday lenders from the start of 2015. For all loans offered by firms who meet the Financial Conduct Authority (FCA)’s definition of ‘high cost short-term credit’, interest is capped at 0.8% per day. This means that a customer borrowing £100 for 30 days and who repays on time cannot be asked to pay more than £24 in interest. No matter how many times a loan is rolled over, or how late payment is made, no borrower can ever be asked to repay more in interest and charges than the amount of their loan. The maximum default fee is £15.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.