Banker bonus reform to trigger tax windfall

The regulators’ decision to bring forward bonus payments could deliver a tax windfall for the Chancellor.

The new rules “come into force on 16 October 2025, in time for 2025 pay awards and any other awards made but not yet fully paid.” That suggests that not only will 2025 bonuses be paid sooner, but existing bonuses that had been deferred may be paid early. That would make 2025/26 a vintage year for bankers.

Since bonuses are usually taxed in the year when they become payable, rather than the year they are awarded, that could result in a bumper payday for the Chancellor as well.

Nicholas Hyett, Investment Manager at Wealth Club, commented:

“Regulators haven’t changed the bonus rules in order to trigger a tax windfall for the Chancellor, but you won’t hear any complaints from a cash strapped Treasury. Of course this is really pulling forward tax that would eventually have been paid anyway, but jam today and hope tomorrow has been the UK government’s approach to fiscal policy for some years now.

For bankers, cash upfront is welcome, but it does mean they could be line for a bumper tax bill as well this year. Fortunately the Treasury provides some relief from record high tax rates, as long as bankers use their windfall to invest in UK start-ups via venture capital schemes.

These schemes have been around for over 30 years and are in place to encourage wealthy investors to back UK small businesses in the early stages. Initiatives like Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) provide income tax relief of between 30% and 50%.

The young businesses these schemes support are seen as crucial to driving economic growth and the creation of high value jobs for the future. They could also add something different to a more conventional investment portfolio- providing exposure to young, ambitious and fast-growing companies – some of which may become tomorrow’s household names. These are riskier and more illiquid investments, but well suited to highly paid, experienced investors from the city.

The net result could be that the bonus reforms result in a triple windfall; for bankers, the Chancellor and start-ups alike.”

About Venture Capital Schemes

Venture Capital Trusts (VCTs)
With VCTs, you invest in a listed company which, in turn, invests in young fast-growing businesses chosen by a fund manager. So, a single investment can give you exposure to a portfolio of 50-100 businesses.

“VCTs are stock market listed funds, not unlike investment trusts, that invest specifically in young, usually private businesses looking to fund growth. They offer exposure to a well diversified portfolio of companies, and thanks to their stock market listing are relatively easy to sell. That makes them a common first port of call for investors with a large tax bill who have already maxed out their pension and ISA allowances.

You can invest up to £200,000 in VCTs each tax year and get up to 30 per cent income tax relief. Most returns come through dividends which are tax free, as is any growth. To keep the tax relief, you must hold a VCT for at least five years.”

Enterprise Investment Scheme (EIS)
With EIS, you invest directly in young and ambitious companies that you choose yourself or that a fund manager chooses on your behalf. Typically, an EIS fund will give you exposure to 5-15 companies, so it’s more concentrated – and hence higher risk – than a VCT. But in recognition of this, the tax reliefs are more generous.

“EIS companies are not dissimilar to the companies backed by VCTs. However, in order to qualify for EIS relief you must invest directly in the company itself. This means EIS investments are usually more concentrated and less liquid – making them riskier.

However, that additional risk is offset to some degree by significantly higher tax reliefs. Investors receive income tax relief of up to 30 per cent. In addition, any growth is tax free; you can also defer taxable gains you might have made elsewhere and the resulting CGT bill; and the investment can qualify for IHT relief if you hold it for two years and on death.

Lastly, if you lose money on your EIS investment, you can write the loss off against your tax bill in the year you make the loss. So if a £10,000 investment resulted in a total loss, once you take into account all the tax reliefs, the most a 45 per cent taxpayer could lose is £3,850. To keep the tax relief you must hold an EIS investment for at least three years.

Investors can invest up to £1m a year in EIS qualifying investments – £2m if those companies qualify as knowledge intensive. This scope makes EIS particularly popular with the very highest earners.”

Seed Enterprise Investment Scheme (SEIS)
SEIS is designed to provide the first capital to help young and ambitious companies get off the ground. You can choose the companies yourself or let a fund manager choose on your behalf. Typically, an SEIS fund will give you exposure to 10-30 start ups.

“SEIS backs the very youngest businesses in the UK, often little more than an idea. That makes SEIS the riskiest of the three venture capital schemes, but it comes with correspondingly generous reliefs. Potential for capital gains tax (CGT) relief is particularly distinctive though less relevant for those worried about paying tax on a bonus.

You can invest up to £200,000 each year, and receive income tax relief of up to 50%. In addition, any growth is tax free; you can also receive up to 50% CGT relief on taxable gains you might have made elsewhere; and the investment can qualify for IHT relief if you hold it for at least two years and on death.

If you lose money on your SEIS investment, you can write the loss off against your tax bill in the year you make the loss. So if a £10,000 investment resulted in a total loss, once you take into account all the tax reliefs, the most a 45% taxpayer could lose is £1,550. To keep the tax relief you must hold an SEIS investment for at least three years.”