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Bank payroll tax revisited: too unsubtle to deliver cultural change?

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In light of the renewed media and Government focus on remuneration in the banking sector, and the passing of the 31 August deadline for the payment by banks of bank payroll tax (BPT) (a 50% levy on all bonuses paid to employees in excess of £25,000), it seems topical to reflect upon the extent to which BPT might be judged successful.

In terms of revenue raising, BPT exceeded all expectations. In his Pre-Budget statement on 9 December 2009, Alistair Darling estimated that BPT would yield just over £500 million. Financial News has since estimated that the actual amount will be at least £3bn – welcome news for HM Treasury.

However, it should not be forgotten that the main stated purpose of BPT was not to raise money, but to seek to reduce the amount of bonuses paid by banks to their employees. In this respect, BPT was a resounding failure. There is no evidence to suggest that banks have reacted in the way the Government hoped – as Alistair Darling himself has recently acknowledged (note that BPT raised some six times the initial amount estimated).

However, from a policy perspective, some credit must be given to BPT as the torchbearer (in the sense of the first such tax imposed by a major Government), leading to a more global discussion on bonus payments. Indeed, it is arguable that subsequent political (and economic) developments in the US did bring about a reduction in global bonus payments, including in London.

Although BPT was intended to be a one-off tax, Nick Clegg has recently hinted that banks could face further measures if they paid ‘ludicrous sky-high bonuses’.

It is, however, not clear to what extent this statement reflects Government thinking, rather than party line. Given what happened with BPT, it is hard to see how any new bonus tax on banks would bring about the change of behaviour the Government would like to see.
The truth appears to be that BPT or similar is too unsubtle an instrument to create the kind of cultural change within banks that the UK Government would wish to see. If that is the goal, a more effective route – courtesy of developments in Europe – may lie in the revised FSA Remuneration Code, currently out for consultation and intended to take effect from 1 January 2011. Under the Code, though bonuses are not outlawed, they are subject to deferment and clawback, and must be part-paid in shares or share-like instruments.

The Code thus seeks to ensure that bonuses are paid only where the performance of the employee and the firm can be seen to justify them, which in any event seems a far more realistic approach than trying to prevent the payment of bonuses altogether.


Daniel Lewin, Tax Partner, Kaye Scholer