UK Bank Payroll Tax Succeeding In Curbing Bonuses

by Robert Lee, Tax-News.com, London

25 January 2010

Despite predictions that banks were preparing to cock a snook at the UK government and lavish their top staff with a generous round of bonuses, it would appear that banking groups will after all rein in the size of bonuses they are due to pay to their London-based employees this year, following the recently announced temporary tax on banks. One top banker, however, is warning that the bonus tax can only have a negative effect on London's financial industry.

It has been reported that a number of banking groups with major operations in London will curb bonus payments this year, including Credit Suisse, Morgan Stanley and JP Morgan, although bank remuneration could still be much higher this year than it was last year as the sector returns to profitability.

Credit Suisse will reduce the size of its bonus pool by 5%, with the bank planning to absorb the cost of the one-off tax across its global operations. Shareholders will share in this burden in the form of reduced dividends, but the bank's 6,000 UK staff will bear the brunt of the bonus cutbacks, with 400 directors to see their bonus pool trimmed by 30%. It is expected, however, that the bank will increase many of its top employees' salaries to partly offset the tax.

Morgan Stanley announced in its full-year and fourth quarter results that it had changed its remuneration policies in response to pressure from shareholders. As a consequence, senior executives will receive company stock rather than cash, and the firm plans to "substantially increase" deferred compensation. Also, Chairman and former CEO John Mack magnanimously recommended to the board that he receive no bonus in 2009, "given the unique operating environment and government support for the industry this past year."

JP Morgan has disclosed that the percentage of revenues set aside to pay its investment banking staff has been reduced to 11% in the last quarter from 37% in the preceding quarter, while Bank of America Merrill Lynch is reported to be preparing to pay bonuses in the form of company stock rather than cash. Deutsche Bank is raising its salary levels in order to compensate for a cut on bonus payouts.

The 50% bank payroll tax on bonuses of more than GBP25,000 was announced by Chancellor Alistair Darling in last December's pre-budget report and applies to retail and investment banks, including building societies, and to banking groups. It will be imposed on bonuses paid from the date of the announcement on December 9, 2009, until April 5, 2011, and is designed to encourage banks to use profits to recapitalize following the financial crisis, rather than reward senior staff.

While many banks now appear to be willing to swallow the tax after initial reports that it would have little or no impact on bonus levels, HSBC chief executive Michael Geoghegan has warned that the UK is in danger of losing business to competing countries because of the government's interference in the realms of tax and regulation.

"I think when you start moving taxation for political reasons, the trouble is, it's an industry that can move," he told Sky News. "I know a large number of bankers are moving out of the UK. They can move because they have opportunities in Switzerland and other places to set up their business."

However, a recent survey by professional recruitment consultancy Morgan McKinley has revealed that recruitment levels are set to rise this year in the City of London. Of the 124 personnel managers and line managers surveyed, 90% expect business activity to increase in the City throughout 2010, and 82.9% stated that hiring volumes will also rise. But just under half (46%) expect that the 50% bank bonus tax will make it more difficult to attract or retain talent.

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