Bonuses surge, the reason is tax

Posted: August 25, 2013 in Taxation
Tags: , , , , , , ,

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April was a good month for bonuses. The reason is not hard to see. The upper tax rate was cut from 50 to 45 per cent in April so a lot of bonuses were deferred from the previous financial year. In all, April saw no less than £4.2 billion paid out in bonuses; that was £1.7 billion up on last year.

Not bad.

Of the total amount paid out, the finance industry saw £1.3 billion. The ‘FT’ reckons that by deferring bonuses in this way, roughly £35 million was saved in tax.

But this begs the question: did the cut in income taxes just impact upon the timing of the bonuses, or, as a result of the lower tax rates, did companies choose to pay out higher bonuses?

The government reckons that by cutting the top tax rate, pay awards will rise, and its tax receipts will increase too. Economic theory has a name for it. It is called the Laffer curve. If the tax rate was say 100 per cent, in a free society no one would bother to work, and tax receipts would be zero. If the tax rate was zero, tax receipts would also be zero. So the government has to find the optimal level.

The current government seems to be saying that level is less than 45 per cent. Is that right?

© Investment & Business News 2013

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