Dec. 9 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling said the U.K. will force banks awarding discretionary bonuses of more than 25,000 pounds ($40,800) to pay a one-time levy of 50 percent.
The tax, effective today, will be paid by all banks that operate in the U.K., including U.S. firms such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. Employees will still have to pay income tax on their bonuses, the Treasury said. The top tax rate on earnings of more than 150,000 pounds will rise to 50 percent in April, a measure announced earlier this year.
Today’s levy will raise about 550 million pounds, less than 1 percent of the U.K.’s total tax revenue, according to KPMG LLP. Darling, whose Labour Party faces an election by June, is trying to mollify voter anger after providing more than 1 trillion pounds to prop up lenders including Royal Bank of Scotland Group Plc in the credit crisis. Barclays Plc President Robert Diamond said yesterday the measure risks driving business away from the City of London.
“This will further damage the image of the City as a global financial centre,” said Shaun Springer, chief executive officer of Square Mile Services Ltd., which advises London financial firms on pay. “This is politically motivated.”
The government introduced the measure after firms that had benefited from taxpayer bailouts began to allocate more money to employee remuneration. Bonuses for U.K. financial services employees may rise by 50 percent to 6 billion pounds this year, the Centre for Economics & Business Research Ltd. said in Oct.
‘Giving Them a Choice’
“There is no bank that has not benefited either directly or indirectly from this help,” said Darling, who ruled out a tax on banks’ profits. “I’m giving them a choice. They can use their profits to build up their capital base, but if they insist on paying substantial rewards, I’m determined to claw money back for the taxpayer.”
The levy is effective until April, when the 50 percent income tax rate will start. The measure may be extended beyond that date if the Treasury finds banks are deferring payments.
About 20,000 bankers will be affected, according to Treasury estimates. The levy will apply to discretionary bonuses, which account for “substantially all” bonuses, according to Patrick Steven, a tax partner at Ernst & Young in London. The measure is unlikely to apply to executives working at private equity funds or insurers owned by banks, according to Bill Dodwell, head of tax policy at Deloitte LLP.
‘Righteous Anger’
It will now cost a bank 162,800 pounds to provide an employee with a 59,000-pound bonus after tax, compared with 112,800 pounds before, said Jill Storey, a partner at KPMG LLP.
“On a bonus of 1 million pounds, the new tax will be 500,000 pounds, National Insurance will be 130,000 pounds, and personal income tax is 400,000 pounds,” said Chris Maddock, tax director of Vantis Group Ltd. “This makes a total of 1.03 million pounds for the Treasury.”
Darling is “speaking to the righteous anger people are feeling toward the people who wrecked the financial system,” said Ken Miller, the former vice chairman of Credit Suisse First Boston and now a private investor. “But this is better short- term politics than long-term economic policy,” he added. “Even if it is unpopular, it is unlikely to ruin London as a world financial center.”
Tax rates in Britain are still far below the levels of the 1970s when Mick Jagger, together with the rest of the Rolling Stones, moved to France briefly to escape liabilities in the U.K.
Callaghan, Thatcher
When Labour was last in power, in the late 1970s under James Callaghan, the top tax rate was 83 percent on earned income and 98 percent on unearned income. The rates were cut to 60 percent and 75 percent when Margaret Thatcher took office in 1979 as her Conservative government tried to revive the economy. By 1988, Thatcher had cut the top income tax rate to 40 percent.
Britain’s financial services industry generates about 61 billion pounds of tax revenue, about 12 percent of the U.K. total, according to PricewaterhouseCoopers and the City of London Corporation, the municipality for the U.K.’s main financial center.
International securities firms such as Goldman Sachs and JPMorgan both base their European headquarters in the square mile. Goldman Sachs International Ltd., one of Goldman’s more 25 U.K. divisions, employed 5,831 people and allocated a total of 81 million pounds in gross wages and salaries in the year through November 2008, according to filings at the Cardiff, Wales-based registrar Companies House.
London ‘Less Attractive’
“London may well look to them now like a significantly less attractive place to build a business,” said Angela Knight, chief executive officer of the British Bankers’ Association, which lobbies for 260 financial companies. “Only concerted international agreements will succeed in reforming remuneration in the financial sector.”
The U.S. House approved in March a 90 percent tax rate on bonuses at companies that received more than $5 billion in government aid in response to disclosures of retention pay for employees of American International Group Inc. The Senate retreated from a similar proposal after President Barack Obama said the U.S. shouldn’t “govern out of anger” and AIG employees began returning their bonuses.
“You may find Obama coming on board now and saying ‘due to what London is doing we are doing the same,’” said Jason Kennedy, Chief Executive Officer of recruiter Kennedy Associates in London. “People are pretty depressed today in the City. At this point there’s no way out.”
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