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Bank Bonus

The Government has targeted bonuses in the banking sector and the perceived contribution bonuses have on risk taking. In his speech, the Chancellor also highlighted the need for the banking sector to recapitalise balance sheets in priority to paying out bonuses.

As a temporary measure, where bank and building society employees are paid or provided with discretionary awards above £25,000 in the period from 9 December 2009 to 5 April 2010, an additional bank payroll tax of 50% will apply to the excess reward over £25,000. This will also apply where an obligation to pay or provide the discretionary bonus arises in the same period. Contractual bonuses are outside the scope. The Government has also indicated that it will consider extending the period of the charge until the relevant provisions of the Financial Services Bill come into force.

The additional bank payroll tax on bonuses will not be deductible for corporation tax purposes and will apply in addition to National Insurance Contributions of the employer and employee and the income tax liability of the employee.

As an example, on a discretionary bonus of £100,000 paid on 18 December 2009, a bank would suffer additional bank payroll tax of £37,500, payable on 31 August 2010 and employer’s National Insurance of 12.8%. The employee is also likely to suffer income tax and employee National Insurance at a combined rate of 41%.

All groups operating in the UK banking sector will need to review their bonus plans, whether cash or other benefits, and consider the application of the new tax for all employees and contractors.

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