City bonus brigade face £100m tax clawback

Some of the City's most highly paid bankers and traders face an unpaid tax bill of more than £100m following last week's Budget.

Gordon Brown's latest measures to shut down payment schemes that reduce income tax and national insurance contributions will fall most heavily on City high-flyers, according to tax experts.

Controversially, the Chancellor will also require beneficiaries of the schemes to pay back all the tax they have avoided since December 2004 - forcing some high-rollers to find money they may already have spent. According to official estimates, the government expects to raise £180m in extra tax from this measure over the next three years.

The payment scheme devised by the Treasury - which was used to pay employees in the tax-efficient form of options on shares and securities - has benefited a variety of workers, including entrepreneurs, but its most frequent recipients are thought to have been bankers receiving large lump-sum bonuses from City firms.

The government has closed numerous exotic loopholes in recent years as part of a drive to crack down on tax avoidance. Previously, some City firms had resorted to paying employees in the form of gold bars and vintage wines in an attempt to reduce their tax bills, and especially national insurance payments. But last week's action against the options loophole is the first occasion on which the Treasury has carried out its threat, issued in the 2004 pre-Budget report, to tackle avoidance schemes retrospectively.

'This is proof, for anyone who still doubted it, that the government is serious,' said John Whiting, a tax partner at PricewaterhouseCoopers. 'The government made it clear in 2004 that everybody was fundamentally required to pay income tax and national insurance on their pay. Schemes designed to sidestep that are likely to fail.'

The move has drawn criticism from other tax advisers. Accountants Ernst & Young warned that 'the implementation of retrospective legislation is a worrying trend and adds to the uncertainty of living, working and doing business in Britain.'

Brown also introduced a raft of more general anti-avoidance measures. He hopes to claw back £75m over the next three years by countering capital gains tax avoidance, especially those schemes that exploit the 'bed and breakfasting' rules on selling shares and buying them back soon afterwards. The government will also close avoidance schemes that use financial products, a move expected to recoup £260m by 2009.