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Junior bankers in London find pay rises eaten by 72% tax rate

After a crazy year of long hours and frantic dealmaking, London's junior investment bankers have had a pay rise. As we reported last week, the going salary for a first year analyst in an investment bank in London is now £60k ($83k), rising to £65k for second years and £70k for third years. Analysts also received bumper bonuses this summer, with some first years receiving over 100% of their salary again in bonus, and third years getting 150% or more. 

This amounts to an impressive pay rise. In 2020, the going rate of total compensation (salary plus bonus) for first year junior bankers in London was £90k. Now it's more like £120k. 

While that's undoubtedly welcome, London juniors will see very little of banks' generosity.

This is because of a quirk of the UK tax system, under which earnings between £100k and £125k are taxed at a marginal rate of 60% as people in that pay bracket lose their tax-free allowance as well as incurring a marginal tax rate of 40%. 

For junior bankers with student loans, the marginal rate is even higher still. - They will also pay an additional 9% of their earnings in student loan repayments. 

Now they must also pay the new social care levy on National Insurance, which adds 1.25% to the previous marginal rate of 2%. 

In total, therefore, analysts stand to see 72% of their pay increases disappearing in taxation. A further 5% is likely to go in pension payments. 

An analyst who received an additional £30k this year, will therefore only take home £8.4k after tax or £6.9k after tax and pension contributions - amounting to £700 or £575 a month. While this isn't negligible, it may leave some juniors wondering whether their 100-hour weeks were worth it. 

Have a confidential story, tip, or comment you’d like to share? Contact: sbutcher@efinancialcareers.com

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Photo by Jon Tyson on Unsplash

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AUTHORSarah Butcher Global Editor
  • Be
    Ben
    6 November 2021

    Inaccurate and stupid, if your smart you always overcontribute to your pension to go below the threshold for the 65% trap of the personal allowance tapering

  • An
    Anonymous
    14 September 2021

    Quite unusual to see pension contributions taken off the bonus payments (then definitely not matched by the employer as it is the case for fix pay => free money), although increasing your contribution, actually to avoid higher tax rate is one of the good options for high tax bracket payers. This article is not really precisely written, would almost call it misleading.

  • C
    C
    13 September 2021

    No. The tax rate is not 72%, as this article breaks down. 72% of their pay rise will be lost (given a certain set of conditions).

    Stupid clickbait headline.

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