British government hits 'bonus culture' with new tax (Roundup)

By Anna Tomforde Dec 9, 2009, 15:48 GMT

Chancellor Alistair Darling departs the Treasury in London, Britain, 09 December 2009. EPA/DANIEL DEME

London - British bankers face a sharp cut in bonus payments this Christmas following the introduction by the government Wednesday of a 50-per cent windfall tax on the controversial pay-outs.

The measure, revealed in a pre-election budget by Alistair Darling, Chancellor of the Exchequer, coincides with an angry public debate about the 'excesses of the bonus culture' exposed by the banking crisis.

Analysts said the step, while being welcomed by the general public, was likely to antagonize bankers who have threatened an 'exodus' from the City of London to other financial centres which have no such levies.

Bankers also argue that the tax is not supported by the principles agreed by Group of 20 (G20) nations earlier this year, whereby bankers would agree to defer bonus payments subject to claw back.

The one-off tax, which applies to this year's bonuses only, will be levied on pools set aside by banks and not directly on the individual recipients.

It applies to reward payments in excess of 25,000 pounds (40,860 dollars) and will be levied on top of a marginal tax already raised on individuals' bonuses.

Darling's move, dismissed as 'populist' by the opposition Conservatives, is estimated to affect some 20,000 bankers.

According to government officials, some 5,000 bankers in the City of London earn more than 1 million pounds in bonuses each year - on top of their regular salaries.

The government hopes the new tax will yield 550 million pounds which will be used for programmes to help young and older unemployed people back into work.

Analysts said the new 'supertax' was meant as a 'warning' by the government that banks should exercise caution when considering excessive bonus payments to staff at the end of the year.

'We hope it will be a disincentive for banks to pay bonuses,' a Treasury official said.

But bankers were furious. 'This is a catastrophe for me,' said one young banker, who did not want to be named. He pointed out that annual salaries above 150,000 pounds are already subject to top tax rates of 50 per cent.

Another described the move as 'extreme victimization,' telling the Financial Times: 'It just wants to make me quit my job.'

The Labour government's move, coming just a few months before a general election, came as big bank's were preparing to pay out generous bonuses despite the recent crisis which saw a number of leading banks rescued by the taxpayer.

The government argues that the one-off tax is justified as banks have made excess profits as a direct, or indirect, result of the 2008 bail-out of the banking system.

The levy will apply to all banks and building societies, including groups that operate in Britain under a European Union branch system.

The government has dismissed predictions that the move will prompt London-based bankers to seek transfers to other European financial centres, such as Zurich, Frankfurt or Paris.

But Bob Diamond, the chief of Barclays bank whose annual earnings are reported to exceed 40 million pounds, has predicted that businesses and individuals would desert London.

'Both financial capital and human capital are extremely mobile,' he told a conference this week.