Last updated: December 10, 2009 12:12 am

Top bankers’ bonus rate to top 100%

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The levy on bankers’ bonuses announced in the pre-Budget report will push the total tax bill on a bonus born by employer and employee to more than 100 per cent, according to the Chartered Institute of Taxation.

The 50 per cent levy on banks paying bonuses above £25,000 will apply until next April, after which any bonuses will come into the new 50p tax regime for those earning more than £150,000.

Alistair Darling unveiled the measure as part of a package designed to ensure “the biggest burden will fall on those with the broadest shoulders”. Together with other tax changes announced during the past year, more than half of the additional revenue raised for the Treasury would be paid by the top 2 per cent of earners, he said.

John Whiting, policy director of Chartered Institute of Taxation, said the total tax rate on bonuses for high-earning bankers would be about 104 per cent, of which about half would be paid by the employee. For an individual receiving a bonus of £1m, the bank would pay the new tax of £500,000, total national insurance would be £138,000 and personal income tax would be £400,000.

PwC, the professional services firm, calculated that it would cost a bank £131 to deliver £59 to an employee caught by these rules.

The new focus on taxing the rich is something of a turnround for a country that has spent the best part of 30 years creating a welcoming tax regime for the wealthy, entrepreneurs and businesses.

During 18 years under the Conservatives, all rates of income tax were reduced, but the largest cuts occurred at the top. After Tony Blair’s 1997 victory there was little change of tone. Peter Mandelson, the party’s chief strategist, famously remarked: “We are intensely relaxed about people getting filthy rich, as long as they pay their taxes.”

In some respects, this approach appeared to create a virtuous circle. As the rich thrived in Britain, they paid a growing share of total income tax. The richest 0.5 per cent of British taxpayers have been paying 17 per cent of total income tax, according to the Paris-based Organisation for Economic Co-operation and Development.

But critics were alarmed by a widening gulf between rich and the poor. Under Labour, the incomes of the richest 0.1 per cent have raced further away from average living standards.

In spite of a new emphasis on redistribution in Labour’s second term, the super-rich became the focus of specific measures only two years ago, after the Conservatives provoked the government to raise a new charge on “non doms” – wealthy foreign residents.

Alistair Darling also reacted to an outcry over low taxes paid by private equity executives by raising capital gains tax on business assets.

Last year he announced higher income taxes for top earners, which were raised still further in this year’s Budget.

Taken together with restrictions on pension contributions, rises in national insurance and new tax rules for foreign nationals, it added up to a marked disincentive for the super-rich to live and work in London, advisers said.

Talk of escaping the British tax net has reached fever pitch among very wealthy clients, some advisers say.

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