Wednesday 9 December 2009

PBR: Extra 13.2% tax on bank bonuses!

50%? Nonsense. Don't believe what you read!

Assuming the 0.5% hike in Employer's NIC and the 50% top rate of income tax would have gone ahead anyway, the effective overall rate on a large bonus would have been 56.8% and it's now 70%.

The maths would have been: salary bonus of £100, plus Employer's NIC = £113.30, employee pays 50% income tax and 1% Employee's NIC so nets £49. £49 divided by £113.30 = 43.2%, so overall tax rate 56.8%.

The maths will now be: salary bonus £100, plus Employer's NIC £13.30 plus surcharge £50 = £163.30. The employee nets £49 as before. £49 divided by £163.30 = 30%, so overall tax rate 70%.

Which is still slightly less than the effective tax rate faced by people on Working Tax Credits, go figure.

10 comments:

James Higham said...

Yes but they have to make it look as if they are being penalized.

AntiCitizenOne said...

You forgot to include VAT on what they spend their earnings on.

Mark Wadsworth said...

JH, exactly.

AC1, OK, stick on VAT, gets us from 70% to 72% (assuming half of what they spend money on is VAT-able).

roym said...

assuming the bonus is paid on time and not witheld for 6 months?

Mark Wadsworth said...

Roym. Doh! I wonder if anybody else will think of that?

Tinxx said...

Sorry Mark, but I think that you miss the point with this 13.2% comment. Firstly, you assume that a bonus would anyway be paid after 5th April instead of before - so what this does is to ensure that no one avoids the 50% tax band on over £150k by paying bonuses before the end of the tax year when legislation brings it in at 50%. If it is only a one time "supertax" this is important but such retrospective taxation is totally different from anything we have seen before. The second point is that you are assuming that the total bonus pool is going to be maintained by the employer post the "supertax". In your example the total payout by the employer for £100 of marginal bonus goes from £100 + 13.2% NI (£113.20) to £163.20. The trouble is, if the bonus pool is "taxed" at 50% prior to dispersal, then there is not a £100 of bonus available to be paid to the individual - there is only £50 available. The employer thus pays out a total of £106.80, but the employee only receives £24.50 - so actually a 77% tax. In the real world - there is most often not an extra top up fund of money that is put into a bonus pool - this is not a government department but a function of profitability. Either that or you just take it from shareholders.

Mark Wadsworth said...

Tinxx, you make one fair point...

"what this does is to ensure that no one avoids the 50% tax band on over £150k by paying bonuses before the end of the tax year when legislation brings it in at 50%."

... and one completely rubbish one:

"... if the bonus pool is "taxed" at 50% prior to dispersal, then there is not a £100 of bonus available to be paid to the individual - there is only £50 available."

Nope. If the pool is fixed at £100, and the employer has to pay 50% of the gross bonus as tax, the amount to be paid out goes down to £66.67, and not to £50.00 (ignoring Employer's NI).

tinxx said...

Mark - there really is no need to be rude. I am not sure of your maths here. Where does it say a 1/3 reduction is the issue? My understanding is that the total bonus pool is to be taxed at 50%, so assuming that there is £100 put into the pool by the bank for employee X Mr Darling plans to take 50% of that before the employee even knows about it. The Bonus pool for dispersal is then £50 (net of employers NI which is now only charged on £50 - not £100 so is £6.60 and is paid out by the employer) The employee then gets his share of the £50 upon which he pays his 51%. Where am I going wrong here?

Mark Wadsworth said...

T, everything I've read says that it will be 50% on top of the bonus, not 50% out of a 'bonus pool'. They also said "the banks will pay it" suggesting it will be like Employer's NI. In which case, a third goes in tax, not half.

tinxx said...

Right - I see that from the detailed summary docs now. Thanks for the clarification