Ending corporation tax relief for pay and bonuses worth more than 10 times average annual earnings could raise around £1.7bn a year if applied to the banking and financial services sector, according to a new TUC report published today.
The TUC report Bonus Season uses data from the Labour Force Survey to show more than a third (36%) of employees earning more than £250,000 a year in the UK work in banking and finance, and that around 81,000 people have incomes of over £262,000 (10 times average annual earnings) that come primarily from employment, including 29,000 people in banking and finance.
The report finds that total pay on earnings above £262,000 – which the TUC believes should be disallowed as a deductible expense for corporation tax purposes – is around £6.8bn a year.
TUC general secretary Brendan Barber said: “Irresponsible banks played the biggest part in causing the crash. But while the rest of us are still paying a heavy price, banks have gone back to business as usual with eye-watering bonuses for their top staff. It is only right that they share these with the rest of us, and making the top bonus pool liable for corporation tax means they would pay a little more towards clearing up the mess they made.”
Ending corporation tax relief on earnings over £262,000 in the banking and finance sector would raise £1.7bn a year – vital revenues towards paying back the deficit created by the financial crash, says the TUC.
The report also estimates that extending the scrapping of corporation tax relief for top pay and bonuses over 10 times average earnings to all UK companies would raise around £5bn a year.
With the government effectively cancelling out its own levy on bank balance sheets by cutting the rate of corporation tax from 28 per cent to 23 per cent by 2014, the banking and finance sector is no longer making a proper contribution towards paying off the deficit it played a key role in creating, says the TUC.
A previous TUC report The Corporate Tax Gap showed that banks already pay well below the headline rate of corporation tax and that that the scale of bank losses at the height of the crash has allowed them to knock £19bn off their future tax bills, despite an £850bn bailout from taxpayers and the Bank of England.
The fact that banks are back recording big profits and handing out billions of pounds in bonuses proves they can easily afford a new tax on big bonuses, says the TUC.
The TUC believes that making earnings more than 10 times average annual earnings liable for corporation tax would not only raise revenue but also tackle growing pay inequality by encouraging companies to spread pay across the workforce, rather concentrating it on those at the very top.
As well as calling for top pay to be liable for corporation tax, the TUC believes the following changes would help tackle the growing pay divide between top executives and the rest of the workforce:
- Bring a much-needed dose of economic reality to executive pay decisions by introducing worker representation on to remuneration committees.
- Make executive pay more transparent by publishing the ratio between top pay and both median company workforce pay and the lowest paid members of staff.
- Tackle the closed shop of non-executive directorships (NEDs) by forcing companies to advertise positions externally.
- Make rates of pay increase for directors reflect those of other employees, with an explanation given in the remuneration report should this not be the case.
Brendan Barber said: “We should not forget banks have enjoyed a level of state support no other industry could dream of, including an £850bn bailout from taxpayers and the Bank of England.
“Scrapping corporation tax relief for earnings over £262,000 will help pay off the deficit and tackle the growing pay divide that has seen a tiny minority of super-rich individuals receive inflation and performance-busting pay rises while everyone else suffers real terms wage cuts.
“The Chancellor should use his budget to end the privileged status that the financial services sector enjoys at the expense of everyone else by announcing a this new tax on excessive pay and bonuses, as well as taking proper steps to reform our failed executive pay culture.”
* The Corporate Tax Gap can be downloaded here