Banks Will Pay 50% Levy on "Discretionary Bonuses" Of Over 25k Pounds

The new "banker tax" that went into effect in the United Kingdom yesterday has sparked a tremendous amount of debate throughout the entire world.

Some are saying "it's about time", while others are saying "this is totally unfair".

The "banker tax", or "banker levy", went into effect in the UK yesterday.

The tax will be paid by all banks that current operate inside the United Kingdom - this includes firms such as JP Morgan and Goldman Sachs.

The tax calls for a one-time 50% tax to be paid on any discretionary bonuses of more than 25k pounds (which works out to about $41,000 in US dollars).

This tax will be paid for by the company that is issuing the bonus. An employee receiving the bonus will still need to pay all of their own personal income tax.

The levy will be effective until April, but could also be extended if the government determines that banks are deferring bonus payments. It should be noted that the top income tax rate in the UK will be increasing as of April.

According to government estimates, more than 20,000 bankers will be affected by this levy.

Let's take a closer look at how the tax will work:

Example: Goldman Sachs decides to pay one of their employees a bonus of 100k pounds.

Goldman Sachs would need to immediately pay the government a "levy" of 50k pounds.

The employee will receive their bonus check for 100k pounds and need to pay:

-40k pounds in income tax
-12,800 pounds for National Insurance

So, this 100k bonus would result in over 100k pounds of tax being paid.

Banks (and bank employees) are obviously not too happy about this levy, claiming that it will help to "damage the image of London as a global financial centre" and make the city a "significantly less attractive place to build a business".

Chancellor of the Exchequer Alistair Darling defended the new tax, stating the levy will motivate banks to shore up their capital base instead of lavishing their employees with large bonuses.

Many are of the opinion that this is a politically motivated move in preparation for a June election.

The levy is expected to raise a total of about 550 million pounds.

Source: Bloomberg.com - Darling's "Politically Motivated" Bonus Tax Attacked

Photo: sonewfangled

Filed under: General Market News