The real challenge

China is more of a threat to the City of London’s international standing than taxes on bonuses, says

Ever since the 50 per cent windfall tax on bankers' bonuses was announced, a chorus of high-pitched noises - the words "stuck" and "pig" come to mind - has been coming out of the City and its adjuncts, from hedge-fund-friendly Mayfair to Canary Wharf. It warns the rest of us that such vindictive action will drive entrepreneurial talent out of the country and bring about the downfall of London as the world's pre-eminent financial centre.

The hedge funds and wealth managers are threatening to decamp to Geneva or Grand Cayman, dealer-brokers to Zurich or Zug. They argue that they can run their global businesses just as effectively out of such low-tax havens. The only loser will be UK plc, both in terms of forgone tax revenues and the international standing of the City of London.

Some of this noise is directed internally to persuade big-revenue earners not to jump ship. For, during a year when banks have benefited from cheap money, public guarantees and rising markets across all asset classes, it has been difficult not to make money hand over fist. Headhunters have not been idle. There has been much poaching of the seriously big hitters.

Raising the possibility of moving to a low-tax jurisdiction is one way of keeping the bonus-hungry on board, alongside avoidance measures, such as substituting salary hikes for year-end bonuses, deferred payments or contracts for difference.

The Treasury's estimates of how much revenue will be raised by bonus-bashing may nor may not be exaggerated. But so, too, are the dire warnings of how the tax will undermine the attractions of London as a financial centre. Some hedge funds may indeed leave. But the big banks and fund managers need to stay close to their clients. Moreover, they rely on the legions of ace City-based lawyers, accountants and information and communication technologies specialists to keep their businesses running and to be more or less tax-efficient.

A one-off windfall tax will not drive them out, especially now that France and other countries have indicated they will follow suit. It is a temporary measure, designed to encourage banks to channel the windfall profits they have made on the back of public money towards rebuilding their capital base, rather than dispersing it among already highly paid employees.

What might persuade global banks to shift more of their operations away from London would be a permanent tax regime that placed them at a disadvantage to other financial centres. The hope is that there will be co-ordinated action by G20 members to prevent such taxation-driven migrations.

The real challenge to the City comes from other developments in the world economy - the relentless rise of China and the other big emerging economies - not just in terms of production but as the new seats of capital. Global banks like to be close to the centres of both capital accumulation and investment. These days, those are overwhelmingly in the east.

Last year, Hong Kong handled more than twice the value of initial public stock offerings in either London or New York. When HSBC decided to move its chief executive, Michael Geoghegan, from London to Hong Kong, it was for long-term strategic reasons, not for tax reasons. Over time, the City may become just one of a constellation of financial centres. But it will not lose its attractions simply because of a one-off tax.

This article is taken from the New Statesman supplement Held To Account: What's next for UK Banking? sponsored by Barclays

Show Hide image

Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.