How banks could structure bonuses to sidestep the 50% income tax rate
Tax avoidance is not popular. Philip Green has fallen foul of anti-avoidance protestors and the UK Treasury is contemplating the introduction of a general anti-avoidance rule.
Nevertheless, taxes in the UK are sufficiently high (50% on anything above 150k, plus 2% national insurance from April next year, plus 14% employer's national insurance), that tax mitigation measures remain on the table - just.
Chief among these is the notion that bonuses could be paid in contracts for difference, for which gains are subject to capital gains tax (at a flat rate of 28%) and National Insurance contributions are thankfully not necessary.
"You're effectively taking a position on a difference in performance," says Chris Page, head of employee incentives at KPMG. "There are a lot of advisors selling this concept to all sorts of companies in the financial sector."
Page says CFD bonuses are a source of joy for both with individuals and businesses. Individuals get to pay less income tax; businesses get to pay less National Insurance.
However, there are downsides.
Her Majesty's Revenue and Customs takes a dim view of anyone trying too hard to mitigate their tax bill. For a CFD scheme to be properly eligible for capital gains tax, there has to be a proper downside risk as well as an upside risk.
Jon Terry, head of employee benefits at PricewaterhouseCoopers says recipients of bonus CFDs therefore need to be prepared to get their chequebook out and forfeit if things go wrong. Actually... not many people are prepared to do this.
Equally, there's a danger that the HMRC will belatedly decide a CFD scheme wasn't really eligible for capital gains tax after all and try to charge income tax and national insurance retrospectively. Bankers at UBS were stung a few weeks ago for tax dating back to 2003 after one of its tax efficient schemes was declared retrospectively invalid.
Page says he's advising clients that the CFD schemes are risky, but they still want to hear about. "This has become absolutely more popular now that the tax rate has gone up."
