Sunday, February 13, 2011

Banker Bonuses : the case for no restraint

So let us assume that a Banker get a bonus of exactly 100,ooo pounds to make the sums simple. We can quite safely assume he is earning more the 37,000 pounds for sure and almost certainly more than 150k, so they will be paying 50% income tax.

12% for class 1 national insurance contributions, but lowered to 9.4 as they are probably contacted out in terms of pensions, so lets assume 10% for easy sums. They will probably be NIC class 1, so that is 10% the employer has to pay.

They could avoid having to pay any tax by making the 100k a pension contribution which would also avoid N.I., but only for the 1st 50k.

V.A.T. is 20%. We might assume that the bonus pot is being spent on fast car or some other luxury because all bankers are flash gits (other than the ones I have meet who seem to be mostly grounded people, but I suspect this is self selecting subset).

So after tax they get 40k to spend, the government gets an other 18k in tax take from the employer and from VAT (if they spend it). Thats a total of 78k for every 100k of bonus, so apart from the way that bonuses distort the behavior, why the hell do we care?

I suspect 2 reasons
  1. Bankers have found a way of avoiding various taxes that I am not party to.
  2. Bankers are an easy media and political target.
There may be a good case that the bonus culture should not be constrained provided they do pay their tax and there is sufficient moral hazard (here is one option I can warm to) to manage the risk of systemic banking failure and the associated wider implications.

Can the 3(I guess) people who read this blog cite specific example of how paying tax on a bonus can be avoided other than the obvious 50k of pension and buying a VCT?

1 comment:

  1. Try:

    Strangely there's not a lot of information published on this topic....