Now that the UK has its first Labour government since 2010 and its sixth prime minister in eight years, will much change for bankers in London? Probably not. As Deutsche Bank’s economics team points out this morning, Labour’s policies are fiscally neutral: total net spending projections only amount to an additional £500m, to be covered by higher taxes.
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Some of those taxes are, however, likely to fall on high earners in the financial services industry.
As we noted yesterday, Labour proposed taxing private equity firms’ carried interest payments as income instead of capital gains, a move that could cost the industry’s very high earners £188k each, annually.
Given that their average carried interest payment was £1.7m, UK private equity professionals can probably afford this, but there are suggestions that some of the other coming tax increases will be more painful. In particular, the introduction of VAT of 20% of school fees is expected to be a source of pain for more moderate earners in the City.
“I know women in banking who send their kids to pre-preps and preps that offer childcare from 7am to 7pm so they can go to work,” says one senior banker. “Everyone I know in banking has their children privately educated, and it’s partly because they work long hours. – These schools also offer holiday clubs and holiday cover, so you can also keep working during school breaks.”
Prep schools can cost around £7k a term, while senior schools are £8k a term plus. “This is paid out of net income,” says the senior banker. “So, fees go up 20%, you need to earn a lot more in salary and bonus.”
If school fees are £35k a year and the £35k come from income taxed at 45%, the implication is that people need to earn £55k in gross to pay current fees. If fees increase 20%, they’ll need to earn an extra £13k.
The senior banker suggests some women in banking will find themselves unable to work as a result. “If they can’t afford to pay for childcare or their children have to go to a state primary which finishes at 3pm, then won’t be able to work. This is a classic political, not economic policy, that has unintended consequences.”
Not everyone is sympathetic to this perspective. One senior female banker in London says she’s excited about the new government’s “return to decency” and that higher school fees are not the issue. “Rich people should pay their taxes,” she reflects.
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