UK To Tax Bankers' Bonuses

by Robert Lee, Tax-News.com, London

10 December 2009

UK Chancellor of the Exchequer, Alistair Darling, delivered his Pre-Budget report on Wednesday, announcing further 0.5% increases in employer's and employees' national insurance contributions, plus a new 'supertax' of 50% on financial sector employees' bonuses in excess of GBP25,000.

That takes the forthcoming (2011) rise in social security tax to 2% in total, worth GBP9bn annually.

Darling told the House of Commons that the banks, which collectively lost GBP80bn in the UK alone last year and which have received substantial sums in public money, that he is "giving them a choice" to rebuild their capital bases, or repay the taxpayer in the form of a special bonus tax.

The new payroll tax will be introduced in the 2010 Finance Bill and will be set at 50%. It will be payable by a financial institution, on the amount of a bonus to which an employee is entitled, to the extent that the bonus exceeds GBP25,000.

A financial institution will also be liable to the payroll tax where the bonus entitlement arises in respect of services performed for the firm concerned, regardless of who awards the bonus.

The new payroll tax will have effect from the time of the announcement on December 9, 2009 until April 5, 2010 for all discretionary and contractual bonus awards.

There is an exception for contractual bonus entitlements where the payer has no discretion as to the amount of the bonus because of a contractual obligation existing at the time of the Chancellor’s announcement.

"There are some banks who still believe their priority is to pay substantial bonuses to their already high-paid staff," Darling observed, adding:

"Their priority should be to rebuild their financial strength and increase their lending. 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."

Other notable measures announced by Darling affecting business taxation include:

  • The introduction of a 'patent box' scheme that will apply a reduced rate of corporation tax on patent income form April 2013.
  • Amendments to the worldwide debt cap rules which form part of the reforms to the way in which foreign profits are taxed in the UK.
  • A 100% first-year allowance for business expenditure on new electric vans incurred after April 2010.
  • A reversion of the value-added tax rate to 17.5% from 15% from midnight on December 31, 2009 (although there will be a period of grace for certain businesses trading across the midnight deadline to charge the lower rate until either when they close, or if earlier, 6.00am.).
  • The publication in the New Year of proposals to reform controlled foreign company legislation.
  • Preliminary discussions to take place concerning the possibility of a move to exemption for foreign branch profits.
  • Further changes to the North Sea fiscal regime to encourage investment in the UK and the UK's oil and gas fields.

Darling also promised a continuation of the government's crackdown on tax avoidance and evasion.

He announced that HM Revenue and Customs will be consulting on a package of deterrents and new tools to help the department tackle offshore tax evasion. This includes a notification requirement for certain new offshore bank accounts and a new tough approach to penalties for offshore non-compliance.

The government will also lay regulations before Parliament before April next year to strengthen the Tax Avoidance Disclosure Regime, requiring the disclosure of certain tax avoidance schemes that concern high value residential property.

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