Hardly a week goes by without the press reporting on yet another poor decision by our government. We all feel cross about these things for a few minutes, but I guess it is human nature not to think about them properly until they affect us personally. This happened to me last week.

One of our regular buyers agreed to buy a highly successful single office lettings business and they were planning to appoint one of their top managers to run it for them. He joined them straight from university and over the last seven years, through sheer ability and hard work, he has worked his way up to be the manager of one of their most successful branches earning a basic salary of £100,000 p.a.

They were so pleased with his performance that they awarded him a bonus of £25,000. It was meant to show him how much he was valued prior to being promoted to run an even bigger office. Unfortunately, awarding this bonus has backfired horribly and has led directly to his resignation. Here is how this happened.

Proud but penalised

The manager proudly told his friend that he had been awarded a £25,000 bonus. His friend advised him to check what tax he would pay on it. When he did, he was horrified to learn that he would be left with less than nothing after tax. As a result of his £25,000 bonus, £25,533 would be taken by the tax man. You may not believe that this is possible, so, here are the figures.

This means an effective tax rate of 71% i.e. £17,750.”

As soon as someone earns over £100,000 they lose £1 of their £12,570 tax free allowance for every £2 extra they earn. This means that the tax rate on his £25,000 bonus was 60% i.e. £15,000. On top of this, he pays 2% National Insurance plus another 9% is deducted to pay for this student loan which is really a graduate tax. This means an effective tax rate of 71% i.e. £17,750.

As if this isn’t bad enough he has a 2-year-old daughter. Because he earned too much, he had already lost his right to claim child benefit which is worth £1,354p.a. However, his bonus £25,000 bonus means that he also no longer qualifies for 30 hours per week of free childcare which is worth a further £7,783p.a.

Knock-on impact to business

When you add all this together, the impact of his £25,000 bonus is that the poor chap will be £533 worse off. He was so disgusted by this that he asked his employer to pay the whole of his bonus into his pension. This avoided the tax but it didn’t make him feel any less resentful about the situation.

At the age of 28, he was looking forward to spending his hard-earned bonus on something nice not locking it up in a pension that he cannot spend for another 30 or 40 years.

As a consequence, their star manager who they so desperately wanted to keep had decided to leave them and take a job in Dubai.

He is exactly the sort of person that the UK needs but the taxman has driven him away.”

What a tragedy this is for everyone. He is exactly the sort of person that the UK needs but the taxman has driven him away. His employer will find it hard to replace him and will probably make less profit and pay less corporation tax without him. And, from my perspective, they have had to postpone the completion date of their business purchase until they can find a new manager so my fee will be delayed or possibly lost forever.

The person in question is not a member of the super-rich, he is an ordinary branch manager but if he fails to return to the UK then the total loss of the tax that he would have paid over his lifetime will be at least £2 million and possibly much more.

The 71% effective tax rate on earnings between £100,000 and £125,140 is a huge disincentive for hard-working people to want to progress their careers and it really is something that the government should look at  as a matter of urgency.

In the meantime, his former employer has had to offer his successor a salary and bonus of £150,000p.a. Because the tax on the next £25,000 is ‘only’ 45% plus 2% N.I. plus for most applicants, 9% graduate tax – so at least the new manager will get to keep £11,000 of it.!