By Scott Hamilton and Gonzalo Vina for Bloomberg, December 9, 2009
Chancellor of the Exchequer Alistair Darling said the U.K. will force banks awarding bonuses above 25,000 pounds ($40,800) to pay a one-time levy of 50 percent.
“This will be paid by the bank, not the bank employee,” Darling told Parliament in London today. “High-paid bank staff will of course also have to pay, as usual, income tax at their top rate on any bonus they receive.”
The tax, which will raise about 550 million pounds, forms part of the Labour government’s efforts to win votes ahead of an election which has to be held by June. Darling is balancing the need to curb a record budget deficit while supporting voters struggling in the U.K.’s longest recession since 1955.
“It sends a message abroad that the U.K. will arbitrarily increase taxes as and when it chooses,” said Shaun Springer, chief executive officer of Square Mile Services Ltd., which advises London financial firms on pay. “This will further damage the image of the City as a global financial centre. This is politically motivated.”
The new levy is effective from today until April 5. From that date, the top rate of income tax will rise to 50 percent on earnings exceeding 150,000 pounds, a measure announced earlier this year.
“There are some banks who still believe their priority is to pay substantial bonuses to some already high-paid staff,” Darling said. “Their priority should be to rebuild their financial strength and to increase their lending.”
Darling’s levy applies to all banks and building societies operating in the U.K., including subsidiaries of foreign banks. The Treasury said the tax will affect about 20,000 bankers.
“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.”
Gilts rallied, reversing declines, after Darling’s announcement in Parliament that economic growth will resume next year. The yield on 10-year gilts narrowed 4 basis points to 3.65 at 1:50 p.m. in London. The pound was little changed at $1.6287 after erasing earlier losses.
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 October. Barclays Plc President Robert Diamond yesterday said a tax on bankers’ bonuses risks putting the country at a competitive disadvantage.
“It is particularly concerning to see this proposal occur at a time when the financial services sector recovery will be important to the U.K.’s growth,” said Rod Roman, financial services partner at Ernst & Young. “Any change needs to be clearly one-off in nature to avoid stifling the upturn.”