Will the bonus tax kill 2010 hiring?

10 December 2009

2 minute read

If you were starting to get excited about the prospects for hiring next year, it may be time to let yourself down gently.

While banks will undoubtedly still have strategic gaps to fill in 2010, the tax on bonus pools has the potential to discourage recruitment in the City.

We can see three factors having a possible effect:

1) Delayed bonuses

Whether delaying bonuses will prove effective as a method of avoiding the tax is unclear.

The technical notes accompanying yesterday's tax rise specify that any 'arrangements... made during the Chargeable Period' (ie. now to April 5th) which make provision for payment for work done during that period will be subject to the new tax.

This being the case, it will be difficult for banks to pay large sums on April 6th (a date which is, in case, open to review). However, banks may find it easier to delay paying until 2010, or even to pay monthly bonuses from April. Any delay in the receipt of this year's bonus allocation is likely to dissuade candidates from moving.

2) Higher salaries

According to tax specialists, the real effect of the new tax will be to push salaries even higher than they are already.

"The whole intention of this is to change the nature of banking remuneration," says Chris Sanger, head of tax policy at Ernst & Young. "It's about reducing the dominance of bonuses in the banking sector and moving bankers to more of a salary focus, as in the rest of the economy."

With top salaries already said to have been increased to 300k at BarCap, BofA Merrill Lynch and Citigroup, pushing salaries even higher will increase fixed costs and discourage all but essential hiring.

"Banks are going to have higher fixed overheads," says Lee Thacker, at search firm Sheffield Haworth.

3) Confusion and uncertainty

But the biggest issue, at least in the short term, is the uncertainty surrounding the new legislation. The technical notes accompanying the bonus tax make provision for the government to both amend the scheme and to extend its duration. Until clarity is provided, banks and HR departments are likely to be more focused on interpreting the results for existing employees than acquiring new ones.

AUTHORSarah Butcher

Global Editor

CD
CDSnotWMD
10 December 2009
The globalisation has already started with the communist countries in Europe taking front row - France and Angela Merkel, who finds the idea of introducing such a tax "charming"...
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an
anon
10 December 2009
Banks are faced with two choices
a) pay 50% surcharge on bonuses befre the new tax year
b) Let the higher earning employees get hit on the 51.5% tax rate in the new tax year , plus a risk that the treasury extends the maturity of the windfall
Either way , given the now highly deferred nature of bonuses it actually makes relatively little difference to the cit and is more of an electionerring tool.
One worry is that most banks may socialise the cost to the bonus pool either way and so the treasury is inadvertantly cornering potential tax revenue for other countries. You may see much higher probabilities that this style tax escalates globally
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