UK introduces tax on bank bonuses
Finance minister announces one-off "super tax" on bank bonuses in his pre-budget report.
Last Modified: 09 Dec 2009 21:06 GMT
Banks have warned that penalising high earners will lead to an exodus of talent overseas [AFP]

Alistair Darling, the British finance minister, has set the stage for the country's next election after announcing a one-off super tax on bank bonuses and other higher taxes on the rich.

Repeated opinion polls show the governing Labour Party is on course to lose the poll that must take place in less than six months and the party hopes Darling's pre-budget report will be enough to help boost its electoral appeal.

With markets keen to see more measures to get the country's record budget deficit down and little money to spend on giveaways, Labour turned up the heat on bankers who many blame for Britain's worst recession since World War Two.

Darling said banks would be charged a 50 per cent tax rate on bonuses they pay to their staff above $41,000 starting today until April 5, 2010, a powerful disincentive for big payouts in this year's Christmas bonus round.

The new tax, which Darling announced in his report on Wednesday, would apply to all banks, building societies and branches of foreign banks operating in Britain.

Talent exodus

The government hopes the move will encourage banks to use additional cash to shore up their capital bases, rather than pay high salaries.

But banking groups have warned that penalising high earners in the financial sector will lead to an exodus of talent overseas.

IN Depth
UK bankers criticise new bonus tax
The country's recession has turned out to be much deeper than forecast in April and the minister had to revise up his borrowing forecast for this fiscal year to a record $290bn or 12.6 percent of GDP.

Though Darling stuck to his economic growth forecast for next year of 1 to 1.5 per cent he was forced to admit he expected the economy to shrink 4.75 per cent in 2009, instead of the 3.25 to 3.75 per cent decline originally predicted.

"Because of the underlying strength of our economy, the pick-up in world demand, and the substantial spare capacity opened up by the recession, my budget forecast ... of growth of 3.5 per cent in 2011 and 2012 remains unchanged," Darling said.

Britain has been put on warning by markets and ratings agencies that it must rein in its spiralling debt.

On Tuesday, Moody's said AAA-rated governments with "stretched balance sheets" such as Britain will come under increasing pressure to announce credible fiscal adjustment plans and start implementing them.

Earlier this year, rival ratings agency Standard & Poor's downgraded the outlook for the UK's rating to "negative" and said it could cut the rating after the election if Britain's next government did not produce a watertight plan to cut debt.

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