50% tax for bankers' bonuses

9 December 2009

Hundreds of thousands of bankers have been left reeling after the government introduced a one-off 50% tax on discretionary bonuses over £25,000.

In his pre-Budget report, chancellor Alistair Darling said the move means banks will have to choose between using the money to rebuild their capital bases - or indirectly return 50% to the taxpayer if they choose the bonus option.

This is intended to discourage banks from paying out huge sums of cash as “rewards for failure” following the public backlash over bankers’ remuneration.

Those banks that opt to pay out 2009 bonuses over the threshold will see the money pooled and collectively taxed.  

Tony Bernstein, senior tax partner at HW Fisher & Company chartered accountants, says the tax will only hit discretionary bonuses - meaning guaranteed bonuses are safe.

He explains: “In other words, the super-tax may not apply to the very people to whom it is meant to apply, including the very top earners."

The fact that the tax will only apply until 5 April 2010 means banks will wait until this date to pay out their bonuses, he adds.

However, the Treasury says it will consider extending the levy if banks don't change their behaviour - and will take steps to stop banks from attempting to dodge paying this tax.

This super-tax will be on top of the income tax due and is expected to line the Treasury coffers to the tune of £550 million. The money will then be put towards reducing unemployment, Darling added.

"There is no bank that has not benefited, either directly or indirectly, from [government] help. This should be a time for banks to rebuild their capital base and become stronger,” he said.

"However, there are some banks that still believe their priority is to pay substantial bonuses to their already high-paid staff. So I am giving them a choice. They can use their profits to build up their capital base. But if they insist on paying substantial rewards, I am determined to claw money back for the taxpayer."

Darling also said that anti-avoidance measures will be implemented immediately in a bid to stop accountancy firms coming up with new ways round the tax.

The British Bankers’ Association said this new tax “has to be set in the context of commitments already made”.

In a statement, the organisation says: “The UK's banks have already agreed to observe pay restraints where bonuses are mostly deferred and paid in shares. We are already well ahead of the other G20 countries in doing this.

"Viewed from abroad, those foreign banks which reward their UK staff with contractually-agreed bonuses are likely to be the hardest hit. London may well look to them now like a significantly less attractive place to build a business."

Other financial experts warn that the move will hurt London’s position as a global financial centre – shooting the government in the foot in the long-term.

Stephen Herring, senior tax partner at BDO, says: “This will discourage financial services executives from transferring to London as they may consider that a short term tax rate could be continued."

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