Westminster blog

There is some furious tax planning afoot at the Treasury. The goal: a one-off levy on bankers that will limit the political damage from that champaigne-guzzling, Porsche-buying, loads-a-money bonus pay-out moment.

It will attempt to placate the baying mob rather than pay down the deficit. But in order for this to work, bankers need to feel the pinch. Announcing a clampdown that includes a big loophole will be a PR disaster for Alistair Darling.

So what are the chancellor’s options? And what can the bankers do to escape his clutches? Here are a few insights from my conversations with Chris Sanger of Ernst & Young and Jon Terry of PwC.

The Options

– Who? the first hurdle is targeting. The narrow option would be to impose the tax on anyone working at an FSA regulated bank (i.e. the 27 institutions with more than £1bn of regulated capital). A wider definition would take in hedge fund managers or those who rely on big commissions (sales execs?). That would sidestep “human rights” concerns, but could look more like an attack on the rich, rather than an attack on rich bankers.

– How? One option is to go for “irregular payments”. The Treasury could say that any disproportionately high income in a single month would be taxed at a higher rate. In order to make sure this doesn’t hit those on more modest means, a threshold of say £1m could be applied. Alternatively, it could impose the levy on any payment that is over a certain proportion of salary.

– When? The Treasury are signalling that such a tax would last for a year. To be more specific, it could decide to apply the tax to any payments relating to the 2009 financial year — irrespective of when it was earned.

– Nuclear option: a 60 per cent income rate for anyone earning more than £500,000. PwC estimate this would raise £2bn — if the rich stood still while Darling took his shot.

The Chase

– Stagger payments. Pay bonuses in instalments, delay the payments until next year, or pay them now before the tax is levied. There is bound to be some wheeze. But the Treasury may apply it to all payments relating to 2009, which will make it hard to sidestep.

– Move countries. The Rolling Stones did it. But their baggage was made up of guitars rather than multi-trillion pound liabilities effectively underwritten by the state. Switzerland is cold. And are there enough school places to accommodate all the kids of UK and US bankers?

– Become a non-dom. Or ask to be employed by the US arm of your operation. But will the costs of rearranging all your financial affairs be higher than the one-off cost of the bonus tax?

– Leave the company. Go to one of the competitors that is outside the “bonus tax”. Hedge funds and smaller financial groups probably look at lot more attractive places to work. But leaving now will mean forgoing all your bonus from 2009.

– Set up as a freelancer. Who wants to be an employee these days? For the entrepreneurial traders, setting up a business will give them the freedom to be properly rewarded, while doing the same job.

– Take a higher salary. But will the bank match your bonus?