Banks respond to Government’s “super tax” pledge

Banks are considering their
response to Governments one-off payroll tax levy of 50 porecent that will apply
to bankers’ bonuses over £25,000 and the options available to affected
employers.

Jon Terry, partner and head of reward,
PricewaterhouseCoopers LLP, commented: “Bankers are innovative and creative
people and will be looking hard at mitigating the impact of this new levy.
However, specific anti-avoidance rules and the Banking Code of Conduct will
make it particularly difficult. A bonus payment of £100,000 previously cost a
bank £81,200 after National Insurance and Corporate Tax deductions whereas the
equivalent payment will now cost £131,200. Despite being faced with a 60%
increased post-tax cost, many banks are likely to seek to meet expectations of
employees where performance has been strong in the interests of retaining
talent and long-term stability. This could be to the short-term detriment of
shareholders.

“Alternatives
to absorbing the new tax charge include not paying a bonus at all for 2009,
increasing salaries to make up any shortfall, possibly changing the way bonuses
are delivered, reviewing contractual binding entitlements and awarding larger
discretionary bonuses in respect of performance year 2010 – but there are
consequences to each of these options. For example, increasing base pay will
inevitably lead to an increase in fixed costs, which could impact on the
competiveness of those organisations and reducing potential awards for 2009 may
make employees even more mobile.

“The
introduction of the levy once again raises the issue of an uneven international
playing field. In the event of the new tax levy reducing bonuses for those
based in London, other financial centres will become more attractive for
employees. On the other hand, if companies decide to press on and pay
competitive levels of bonus and to suffer the new tax, the cost of doing
business in the UK becomes greater.

“This type of targeted legislation is always difficult to implement exactly as
intended. The devil as always lies in the detail.”

11 December 2009