Levy on bankers' bonuses
Bank Payroll Tax (BPT) is a 50% levy on bonuses of more than £25,000 paid to bankers on or prior to 5th April 2010. The tax is levied on banks rather than the employees receiving bonuses. It will not attract corporation tax relief.
Where bonuses are paid which fall within the new rules, the total tax cost would be 103.8% of the amount of the bonus received (in excess of £25,000), as set out below:
|Bonus Amount paid (in excess of £25,000)||£100,000|
|Employee Tax and National Insurance Contributions||£41,000|
|Employer National Insurance Contributions||£12,800|
|Total tax cost||£103,800|
Detailed anti-avoidance provisions include rules to ensure that the BPT applies to loans made during the period of the BPT where one of the purposes of the loan is the reduction or elimination of BPT or any other tax or national insurance contributions. Where a loan is subject to the legislation, the amount charged to BPT will be the amount of the loan rather than the normal interest equivalent amount charged on loans from employment. It appears likely that this will apply to most loans from an employee benefit trust.
There are limited exclusions for share benefits delivered through HMRC approved plans but the legislation will apply to other forms of long term equity awards.
Who will be affected?
Banks, or their intermediaries, making bonus payments in excess of £25,000 to employees of UK resident banks or building societies, members of a banking group, UK branches of overseas banks, or companies within a banking group.
'Employees' include people resident or working in the UK for a bank or building society whose duties relate to regulated activities or the lending of money.
BPT also applies to intermediaries of either the bank or the employee or to personal services provided by an individual and, as such, extends beyond the banks.
The BPT applies to discretionary payments payable from 9 December 2009 to 5 April 2010 or contractual payments within those dates under commitments entered into on or after 9th December 2009. The tax will be payable on 31 August 2010.
The rules also apply to arrangements for the making of future payments (or provision of money's worth or other benefits or any reward equating in substance to remuneration). Where arrangements are made for future payments (such as post 5 April 2010), BPT will apply by reference to the date when the arrangements are made on the amount which it is reasonably assumed will be paid or benefit which it is reasonable to assume will be provided.
Action to respond to concerns over the expected level of bonuses paid to bankers had been widely expected in today's PBR announcements; this measure was introduced as preferable to a windfall tax on the banks, instead, giving them a choice between building their capital or paying bonuses (subject to the newly announced levy).
The BPT will have a substantial effect on the payments of bonuses within banks in the current tax year. As a 103.8% effective tax rate on bonuses, this will represent a significant cost for banks operating in the UK.
There are also several concerns about how the BPT will operate. At present, it appears to apply disproportionately to deferred bonus amounts paid in accordance with the principles supported by the FSA and related reports. For instance, a deferred bonus awarded in the current tax year in the form of deferred equity payable over three years could give rise to BPT on the full projected value of that bonus whereas three series of annual payments should only be subject to the value of the award for the current year (subject to any possible extension of the tax to later years).
There is also a concern that the detailed coverage of the legislation might extend further than currently envisaged, and that although it is currently limited to the period to 5 April 2010, there would be the option to extend it for further periods.
In the short term, banks will plan to mitigate the impact of the new rules. It can be expected that where bonus awards have not been made for the current year, such awards are likely to be deferred until future years (but with care being required to avoid there being any arrangements for future payments) and that this will extend to longer term awards such as restricted stock or other equity benefits.
In the longer term, there will be pressure on the Government to reverse this
measure, and banks will reconsider whether their banking operations should be
located outside the UK.