Magazine |
Grey area emerges on bonus tax

Alistair Darling’s announcement of a one-off 50% levy on discretionary bonuses in banks operating in the UK opens up a grey legal area, employment law specialist Fiona Bolton of Eversheds has warned.

The Chancellor confirmed the widely-trailed bonus tax in the Pre-Budget Report on 9 December. It will be reserved for ‘discretionary’ bonuses above £25,000.

‘If it is intentional that the temporary bank payroll tax of 50% is to apply to discretionary bonuses above £25,000 only, rather than to contractual bonuses, this throws up some interesting questions from an employment law perspective,’ said Ms Bolton.

‘It is not always straightforward to establish whether or not a bonus is contractual or discretionary and there is often a fine distinction; who will make the decision as to whether or not a bonus is "discretionary" for these purposes?’

Case law has grown up surrounding the exercise of employer discretion in awarding bonuses, she added. ‘In essence, employers must exercise any discretion in good faith and not capriciously or irrationally. Before making bonus decisions, banks would be wise to consider carefully how they exercise any discretion in the wider context and the context of any internal guidelines, rules or practices that might be in place, and not just in the context of the temporary payroll tax.’
09/12/09