If you’ve ever wondered why managing directors in investment banks don’t always retire after a decade of earning $1m+, today’s report on the characteristics of high earners from the British Institute of Fiscal Studies helps explain why: compared to many of their equally rich peers, high earners in banks don’t have that much to spend.
The Institute of Fiscal Studies (IFS) calls out the numbers. To rank in the top 1% of UK income tax payers (310,000 people in total), you’ll need a taxable income of at least £160k ($194k). To rank in the top 0.5%, you’ll need £236k ($287k), and to rank in the top 0.1%, you’ll need £650k ($790k).
Most managing directors in investment banks, in other words, are in the top 0.5% of UK earners. However, the IFS also says that the top 0.5% of UK earners are special in the way their earnings are structured. – A third of their income comes from partnership and dividends, on which they pay less tax.
In the UK, dividend income is taxed at 38% for higher rate tax payers and does not involve long hours at a desk. Partners, meanwhile, are taxed as self-employed individuals, allowing them to offset various costs against their income.
By comparison, the average senior banker still works long hours and is taxed through the pay as you earn (PAYE scheme), at a rate of 45% on all income above £150k. As a result, banking MDs lose an extra £35k+ a year to the taxman compared to their rich compatriots living a life of leisure on dividends.
No one’s going to feel any sympathy for banking MDs who are bringing home over £50k ($61k) a month, and rightly so. But the IFS’s revelation does explain why some high earners at the top of the finance industry don’t feel as liquid as the people they consider their peers – they’re not.
The London School of Economics’ Inequalities Institute encountered a different perspective on the same issue in 2017 when it spoke to an unnamed City of London banker earning a “few hundred thousand pounds” a year. The banker said his level of income didn’t, “feel that great,” compared to other parents at his childrens’ school who had assets of £100m+ and were living off dividends and other passive income. ” “None of them really work,” he complained, noting that those that did just had a little vanity hedge fund “on their own terms.”
Banking has always involved long hours, but in the distant past banks had all sorts of measures for ‘mitigating’ the tax paid on bonuses. Coincidentally, bankers used to retire younger then too. These days, high earning bankers are taxed like everyone else – except their peers in the 0.1%.
Sarah Butcher – Read more on efinancialcareers.com