By Ambereen Choudhury and Gavin Finch
(Bloomberg) – U.K. Chancellor of the Exchequer Alistair Darling’s “populist and discriminatory” tax on banker’s bonuses risks driving business away from London, financiers in the U.K. capital said.

The U.K. will impose an immediate one-time levy of 50 percent on bonuses of more than 25,000 pounds ($40,800), Darling told Parliament in London today. The tax will be paid by the banks, and employees will still have to pay income tax on their bonuses.

The government provided more than 1 trillion pounds to prop up lenders including Royal Bank of Scotland Group Plc during the credit crisis. Barclays Plc President Robert Diamond said yesterday a windfall tax would risk driving bankers away from London to rival financial centers. The levy, which will apply to about 20,000 bankers, will raise about 550 million pounds, less than half Barclays Plc’s third-quarter profit.

“They are killing the golden goose that is the financial system,” said Neil Jones, head of European hedge-fund sales in London at Mizuho Corporate Bank Ltd. “This is unprecedented. We expect to see a further exodus of financial institutions abroad to more tax-friendly environments.”

The tax forms part of the Labour government’s efforts to win votes ahead of an election that has to be held by June. Darling is balancing the need to curb a record budget deficit while supporting voters struggling in the U.K.’s longest recession since at least 1955.

‘Populist and Discriminatory’

“He is cynically appealing to the electorate without believing that he can gain any material revenue,” said Philip Keevil, senior partner at investment bank Compass Advisers LLP and a former head of Citigroup Inc.’s European mergers team who also campaigns for the opposition Conservative party. “It seems both populist and discriminatory.”

Britain’s financial services industry generates about 61 billion pounds of tax revenue, about 12 percent of the U.K. total, according to PricewaterhouseCoopers and the City of London Corporation, the municipality for the U.K.’s main financial center. New York-based Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among U.S. investment banks have their European headquarters in the U.K. capital.

“London may well look to them now like a significantly less attractive place to build a business,” said Angela Knight, chief executive officer of the British Bankers’ Association, which lobbies for 260 financial companies. “Only concerted international agreements will succeed in reforming remuneration in the financial sector.”

‘Govern Out of Anger’

The U.S. House approved in March a 90 percent tax rate on bonuses at companies that received more than $5 billion in government aid in response to disclosures of retention pay for employees of American International Group Inc. The Senate retreated from a similar proposal after President Barack Obama said the U.S. shouldn’t “govern out of anger” and AIG employees began returning their bonuses.

Leaders from the Group of 20 nations agreed at their September summit in Pittsburgh to adopt guidelines restricting the amount banks can devote to their bonus pools and requiring payments to be deferred and subject to claw-backs.

“There is no bank that has not benefited either directly or indirectly from this help,” said Darling, who ruled out a tax on banks’ profits. “I’m giving them a choice. They can use their profits to build up their capital base, but if they insist on paying substantial rewards, I’m determined to claw money back for the taxpayer.”

‘Bankers’ Folly’

The U.K. levy is effective today until April 5. From that date, the top rate of income tax will rise to 50 percent on earnings exceeding 150,000 pounds, a measure announced earlier this year.

“The people who earn most should pay the most,” said Dave Prentis, General Secretary of Unison, the U.K.’s largest public employees’ union. “It’s just not on to make nurses, social workers, dinner ladies, cleaners and hospital porters pay the price for the folly of the bankers.”

The measure is unlikely to apply to executives working at private equity funds or insurers owned by banks, according to Bill Dodwell, head of tax policy at Deloitte LLP.

“It’s populist politics,” said Chris Roebuck, a visiting professor at Cass Business School in London. “This is going to hit nearly anybody who works at an investment bank anywhere in London. Because it’s a one-off, most people are going to swallow this.”

Bonuses for financial services employees may rise by 50 percent to 6 billion pounds this year after earnings rebounded following the global financial crisis, the Centre for Economics & Business Research Ltd. said in an October report.

“It sends a message abroad that the U.K. will arbitrarily increase taxes as and when it chooses,” said Shaun Springer, chief executive officer of Square Mile Services Ltd., which advises London financial firms on pay. “This will further damage the image of the City as a global financial centre. This is politically motivated.”

To contact the reporters on this story: Ambereen Choudhury in London achoudhury@bloomberg.net

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