It’s over a year now since I pointed out that it is actually in the best interest of the British taxpayer for banks (or any other business) to pay large bonuses to their staff. It isn’t hard to see why this should be so and so I’m rather surprised that neither the media nor Government Ministers have taken this on board.

The plain fact of the matter is that Her Majesty’s Revenue & Customs (HMRC) get far more money when a bonus is paid (more in fact than the person to whom the bonus is paid) than they would do if bonuses were lower as the amount of National Insurance (NIC) and Income Tax far outweighs what would be payable by way of Corporation Tax.

Let me explain in more detail. Companies, be they banks or any other business, pay Corporation Tax (CT) on their profits. The current rate of CT is 28% (it is lower for small businesses but there are no banks in this category). Any payment a company make to its employees as salary or bonus reduces the profit of the company and so less CT is payable. However, the salary or bonus payment is liable to NIC and Income tax at far more than 28%.

It has been reported – but not confirmed – that the Royal Bank of Scotland are to pay their Chief Executive Officer (Stephen Hester) a bonus of £2.5 million this year. Let’s do the mathematics to see how much the taxpayer would get if the bonus were paid against how much it would get if the bank listened to the government and paid none.

1 – RBS Agree to Request for Restraint and Pays No Bonus to their CEO

  • Profit increases by £2.5 million meaning RBS liable for extra £700,000 of Corporation Tax

2 – RBS Ignores Request for Restraint and Pays £2.5 Million Bonus

  • In addition to the bonus paid to their CEO RBS will pay employers’ NICs on the bonus at 12.8% being £320,000.
  • The £320,000 reduces the profit figure meaning RBS pay £89,600 less Corporation tax.
  • CEO pays Income Tax on £2.5 million at 50% plus an extra 1% employees’ NIC meaning a payment to HMRC of £1,275,000.

This means that if the bonus is paid HMRC will receive £1,275,000 from the CEO and a net of £230,400 (the employers’ NIC less saving in Corporation Tax) a total of £1,505,400 – More than double the tax that would be paid if the bonus was not paid.

Given that we are told that banks are looking to pay out over £7 Billion in bonus payments this year you can see that the amount that is going to be paid to HMRC is a massive £4.215 Billion as opposed to £1.96 Billion in Corporation Tax if the bonuses are not paid. Note that the tax position is the same whether or not the bonuses are paid in cash or in shares. In fact more of the bonus payments will, thanks to the coalition government, be payable in shares.

That’s a massive £2.255 Billion extra for the taxpayer. So why don’t the government point this out? I’d have thought that explaining this would go a long way to taking the heat out of the situation. Mind you, perhaps they would then have to address the whole bonus system and the way that the figures can be massaged to justify such payments and in all honesty that is something that can only be addressed by international agreement – and we know how hard that would be.

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Category: Taxation


11 Responses to “British Banks Should Pay Bigger Bonuses”

  1. James Green says:

    At least 99.99% of the bankers who are getting these large bonus payments are employees. Therefore tax and national insurance are deducted by their employers before they get any money paid to them. In addition the bank, as employer, has to pay over Employers National Insurance. Those few who are not employees will be working under contracts directly or via a personal service company. If they fail to pay then the chances are the bank will have to stump up.

    There are situations where partial bonus payments are paid into Employee Benefit Trusts and in this case collection of tax etc can be delayed. There are issues around such trusts but the recent Budget announced proposed actions to deal with these. One can however on wonder why the last Labour government ignored these potential loopholes.

  2. Sidney says:

    Whilst I agree with the figures in theory, I fear in practice some of those so called helpful bankers are only in it for themselves and after twelve months disappear from the UK to some other part of the international financial world before they have to send in their Self Assessment tax returns.

  3. Bob says:

    Good article, I was thinking about this the other day and not only the benefit of increased tax but the types of people who get these bonuses don’t tend to sit on it therefore the other half not taxed would be spent in the wider community encouraging growth and service jobs (the main job sector in the uk) good idea. But if you think purely on tax revenue and forget the overall picture, companies can end up paying bonuses that they cannot afford in the long term and then their bonuses come from the taxpayers purse. Not a good idea.

  4. AC says:

    Interesting James and I don’t think it stops there.

    What the individual does manage to retain after tax gets spent in the economy contributing to other companies’ growth and therefore their taxable profits. Did you see the programme on Channel 4 before Xmas about the economy? That argued similar points about needing the money to flow in a free economy to create growth and that money simply paid to the government cannot create growth and prosperity. It argued for a higher level of personal allowance and a lower rate of income tax. In fact they quoted a personal allowance of £10k and a top tax rate of 20% (the rate in the Isle of Man) to create more free flow of cash, less tax avoidance greater, growth and ultimately more prosperity.

  5. James Green says:

    Eric, I think that Ed Harris makes very good points on the problems that any international agreement on financial regulation would throw up.

    I’m not suggesting that. My comment on some sort of international agreement refers only to the issue of bonuses. Today we have heard from the Chairman of Royal Bank of Scotland saying that some of those receiving large bonuses don’t actually deserve them.

    I personally find the bonus culture quite repulsive. This isn’t confined to banks or even the financial sector. We see situations where civil servants (even tax officers) doctors and a whole lot more seem to get bonuses that are out of proportion to any real “extra” service or profit they have provided. Indeed we even see instances where bonuses are paid when an organisation fails to meet its targets or even makes a loss.

    In a recent Employment Tribunal decision it was found that Birmingham City Council were paying bonuses to refuse collectors, gardeners and the like just for turning up for work – even when they were not at work because they were ill or on strike! Bad enough that you should get a bonus for just doing the job you were engaged to do but far worse when you still get paid the bonus even when you didn’t do it. You couldn’t make it up. In this case these practices came to light because of action taken for sex discrimination because the only “occupations” where these payments were made were male dominated. Female staff, such as cleaners or dinner ladies didn’t get paid any bonuses. The proven fact was that these “bonuses” were being paid to male employees so as to subvert equal pay legislation, which, until now, was held only to apply to the basic pay rate. If a female cleaner doesn’t ever qualify for a bonus but a male refuse collector gets one just for turning up (forget the fact he also gets it if he doesn’t turn up) – how can that be “equal pay for work of equal value”?

    However, whilst that shows up how the whole “bonus culture” is being abused in general, in particular my concerns in the financial sector are that it is all too easy for bonuses to be inflated because the terms on which they are payable are not robust enough to ensure that a short term profit one year which results in a bonus is not counterbalanced by a claw back in cases where the same investment results in a loss the following year.

    So whilst I agree with Ed that an overall regulatory regime won’t work I believe that in the case of financial organisations, be they merchant banks, fund managers (be they hedge funds or not) there needs to be an international agreement on how bonuses are to be calculated, how they are to be paid, and how they can be clawed back. There cannot be an obligatory regime but it should be possible to draft a “code of best practice” for this issue and any provider or product which does not meet that code should be flagged up so that potential, or existing, investors can decide whether they accept the situation or not.

  6. Ed Harris says:

    In terms of international agreement on financial regulation, did you see the mini-report published on the Taxpayers’ Alliance website last week?
    It argued that if every national regulator is doing the same thing at the same time, for example in terms of capital requirements and the type of assets which must be held to satisfy those requirements, you have a pro-cyclican regulatory environment which will make booms and busts more extreme.

    Sounds plausible to me. With the same regs everywhere, there would have been no Credit Crunch success stories like Norway and Canada. Better to have competing regimes where the good ones survive and are imitated and the bad ones fail and disappear.

    The only reason why governments don’t like the idea is the fear that if they get it wrong all the businesses will bugger off to one they like better. Hence the frankly bizarre attempt to bash offshore financial centres as a ‘response’ to the crisis, as if Lehman Bros lent unwisely because of the Marshall Islands.

    International agreements are always a kind of stitch-up in order to allow governments to pursue anti-growth policies without suffering the usual consequences in reduced market share. Vide global warming.

  7. Eric Mannering says:

    You seem to be suggesting that there needs to be some sort of international agreement on the regulation of bonuses and, presumably, of financial institutions but I can’t see how that would work.

  8. James Green says:

    The Coalition must always have one eye on “how cuddly” a policy is, but given the fact that they are already struggling with unpopular cuts and attacks based on the perception that the taxpayer is losing out when high bonuses are paid I think they really should try to get the public to see that there is an upside for the taxpayer in these high bonus payments.

  9. James Green says:

    Gustaf, although I wrote this with a slightly humourous tone I think you should take it as “Many a True Word Spoken in Jest” as my tongue was nowhere near my cheek.

  10. Ed Harris says:

    Very good. Alas, the political argument is not fiscal or economic but aesthetic. How cuddly is this policy? What would a sacked Local Authority Community Outreach Coordinating Manager in a marginal constituency think about it?

  11. Gustaf says:

    Good article. Although you no doubt wrote it with tongue firmly in cheek it should be something that is considered.

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