The tax applies to bonuses above $40,800 and will be paid by banks, not workers, Exchequer Darling says
By Thomas Penny
(Bloomberg) — Chancellor of the Exchequer Alistair Darling imposed a 50 percent levy on banker bonuses and said he will increase income taxes after elections next year as the worst recession on record drives up U.K. government borrowing.
The Treasury expects to raise 550 million pounds ($896 million) targeting payouts at all banks operating in the U.K. from today and another 3 billion pounds from incomes earned after April 2011. Borrowing will rise by 4.6 billion pounds to 611 billion pounds in the four years through March 2013.
Trailing in opinion polls before an election that he must hold by June, Prime Minister Gordon Brown is balancing the need to clamp down on a record peacetime budget deficit while extending support for voters struggling to keep their jobs.
"At this stage in the electoral cycle, the chancellor's weapon of choice is a butter knife rather than an axe," said Alan Downey, head of public sector consulting at KPMG. "Those who were expecting a plan for reducing public expenditure will be disappointed."
U.K. government bonds rallied after Darling said growth will resume next year. The yield on 10-year gilts narrowed 3 basis points to 3.662 percent at the close of trading in London as Darling forecast less borrowing than economists had expected.
The British Bankers' Association Chief Executive Angela Knight said foreign banks that reward staff with contractually agreed bonuses will be "hardest hit" and may look at London as "a significantly less attractive place." Richard Lambert, director general of the Confederation of British Industry, said Darling's "jobs tax" was a "serious mistake."
Brown has narrowed the gap with the Conservatives since September by attacking bankers, who the ruling Labour Party blames for the credit crisis that began in 2007. Five polls since the beginning of November have signaled the Conservative lead over Labour is narrow enough to deny the opposition an outright victory in the election.
"We must continue to support the economy until the recovery is established," Darling said in a speech in Parliament. "The choices are between going for growth or putting the recovery at risk."
Darling also is pressing Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc to step up lending and repair balance sheets after the industry took 117 billion pounds of Treasury aid. The fee on bankers applies to discretionary payments of more than 25,000 pounds and will be paid by the bank, not the employee. Employees also will have to pay tax on the bonus at their marginal rate, which already is due to rise to 50 percent from 40 percent on wages over 150,000 pounds from April.
"There are some banks who still believe their priority is to pay substantial bonuses," Darling said in Parliament. "I am giving them a choice. They can use their profits to build up their capital base. If they insist on paying substantial rewards, I am determined to claw money back for the taxpayer."
It will now cost a bank 162,800 pounds to provide an employee with a 59,000-pound bonus after tax, compared to 112,800 yesterday, said Jill Storey, a partner at KPMG LLP.
"On a bonus of 1 million pounds, the new tax will be 500,000 pounds, National Insurance will be 130,000 pounds, and personal income tax is 400,000 pounds," said Chris Maddock, tax director of Vantis Group Ltd. "This makes a total of 1.03 million pounds for the Treasury."
Wealthier taxpayers were also hit with a clarification of pension rules announced in April. People earning 130,000 pounds or more will pay tax on the sums their employer contributes, effectively cancelling out relief usually paid out on pension payments made by employees. The measure takes effect in 2011 and raises 500 million pounds by 2013.
Darling had to make sure that "those who did most to cause the crash and did best from the boom make their proper contribution through a fair tax system," said Brendan Barber, general secretary of the Trades Union Congress, whose members fund two-thirds of the budget of Brown's ruling Labour Party.
Conservative lawmaker George Osborne, who speaks for the opposition on finance, suggested Darling's bonus curbs don't go far enough.
"We warned him they should stop big cash bonuses," Osborne said. "They are going to pay out a load of bankers' bonuses they shouldn't have been paying in the first place."
From 2011, Darling said he'd raise National Insurance contributions, which are paid by all wage earners to cover health and pensions. The measure hits all those on earnings of more than 20,000 pounds, below the median wage.
Tax rates in Britain are still far below the levels of the 1970s when Mick Jagger, together with the rest of the Rolling Stones, moved to France to escape liabilities in the U.K.
When Labour was last in power, in the late 1970s under James Callaghan, the top tax rate was 83 percent on earned income and 98 percent on unearned income. These rates were cut to 60 percent and 75 percent when Margaret Thatcher took over in 1979. By 1988, Thatcher had cut the top tax rate to 40 percent.
The top 10 percent of wage earners pay 53 percent of the income tax raised in the U.K., says Deloitte & Touche LLP. The financial services industry contributed 61.4 billion pounds in tax in the fiscal year through March, 12 percent of the Treasury's total revenue, the BBA says.
Darling also confirmed he'd return value-added tax to 17.5 percent at the end of this year from 15 percent. He extended tax relief on empty properties, cut duties on bingo gaming and raised the basic state pension by 2.5 percent from April. He also will increase disability benefits by 1.5 percent.
"This isn't much of a game-changer," said Anthony Wells, a polling analyst at YouGov Plc. "None of the measures look like obvious election bribes. There's no solid thing they can point at and say 'this is the big thing we're going to do that the public will see is addressing the debt.'"
Today's budget reduces government revenue by a total of 1.2 billion pounds in 2010 while raising 8.63 billion pounds in fiscal 2012 and 2013 when the economy is back to its long-term trend rate of growth, the Treasury estimates.
The chancellor extended a program guaranteeing jobs or training youth unemployed for more than six months, half the time it previously took to qualify.
Young people have felt the brunt of the recession, accounting for three quarters of the jobs lost in the last year. The number of 16- to 24-year-olds seeking work in the quarter through September climbed to 19.8 percent, almost triple the national average, government statistics showed on Nov. 11.
"The pre-budget report is about recovery from recession by investing in the future and about getting growth in the economy," Brown said in Parliament before Darling spoke.
He said the economy may shrink 4.75 percent this year, more than his April forecast for a contraction of no more than 3.75 percent. He expects the economy to grow up to 1.5 percent next year and 3.75 percent in 2011.
The chancellor revised down the estimate for possible taxpayer losses from bailing out the banks to 10 billion pounds from 50 billion pounds.
Liberal Democrat Vince Cable said, "for the next five years or longer there's going to be a real hard slog for the economy, and the chancellor hasn't set out the way through it."
To contact the reporter on this story: Thomas Penny in London at email@example.com.
This is an updated version of a story that ran earlier today.