Autumn Budget 2017: Hefty bankers' bonuses boosted income tax last year, OBR reveals, as Hammond plans to wring more from private equity

 
Lucy White
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The Budget also revealed plans to wring more money from private equity managers (Source: Getty)

Bonuses awarded in the financial and business services sectors over the past year have boosted income tax, according to statistics from the Office for Budget Responsibility (OBR) today.

Receipts from pay-as-you-earn (PAYE) income tax and National Insurance (NI) contributions were £2.1bn higher than predicted in the 2016/17 financial year, which the OBR attributed to whopping end-of-year rewards.

This prompted the public finance watchdog to increase PAYE and NI expectations by £1.9bn for the 2017/18 year, as it predicted bonuses would continue to grow.

Read more: Financial services bonuses jumped 10 per cent last year (but it's still below its 2008 peak)

Hammond added in the Budget that the government is expecting to wring another £650m from private equity managers over the next five years, through tax on carried interest (a share of the profit from an investment which is paid to the investment manager).

In the 2016 Budget, then-chancellor George Osborne revealed that carried interest would be taxed at a higher 28 per cent rate of capital gains tax. However he introduced certain provisions which would allow managers to continue using methods to avoid paying the full amount.

Hammond today cut off these provisions, fearing that they were being misused for tax avoidance purposes.

Read more: Budget 2016: Ouch. George Osborne cuts capital gains tax - but landlords and buy-to-let investors lose out

Yet Prahbu Narasimhan, from law firm White & Case, noted that there was some comfort for private equity professionals in the assurance that carried interest would continue to be taxed as a capital gain rather than at the higher rate of income.

"The UK tax policy is now fairly clear – fund managers can get capital gains on carried interest, unless targeted rules apply in certain circumstances, but they will be expected to pay the full 28 per cent capital gains tax,” he said.

The government will also be looking more kindly on banks, according to today's forecasts from the OBR which predicted that the extra tax payable by banks would fall.

Bank levies, which were introduced in the wake of the financial crisis, will continue to be phased out in favour of the bank surcharge. But while the amount generated by bank levies and surcharges totalled £4.6bn in 2016/17, this will fall to £3.2bn by 2022/23.

Read more: Spring Budget 2017 figures predict banks will cough up an extra £2.1bn in bank levy and surcharge payments compared with Autumn Statement 2016 forecasts

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