Junior bankers in London find pay rises eaten by 72% tax rate

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Junior bankers in London find pay rises eaten by 72% tax rate

After a crazy year of long hours and frantic dealmaking, London's junior investment bankers have had a pay rise. As we reported last week, the going salary for a first year analyst in an investment bank in London is now £60k ($83k), rising to £65k for second years and £70k for third years. Analysts also received bumper bonuses this summer, with some first years receiving over 100% of their salary again in bonus, and third years getting 150% or more. 

This amounts to an impressive pay rise. In 2020, the going rate of total compensation (salary plus bonus) for first year junior bankers in London was £90k. Now it's more like £120k. 

While that's undoubtedly welcome, London juniors will see very little of banks' generosity.

This is because of a quirk of the UK tax system, under which earnings between £100k and £125k are taxed at a marginal rate of 60% as people in that pay bracket lose their tax-free allowance as well as incurring a marginal tax rate of 40%. 

For junior bankers with student loans, the marginal rate is even higher still. - They will also pay an additional 9% of their earnings in student loan repayments. 

Now they must also pay the new social care levy on National Insurance, which adds 1.25% to the previous marginal rate of 2%. 

In total, therefore, analysts stand to see 72% of their pay increases disappearing in taxation. A further 5% is likely to go in pension payments. 

An analyst who received an additional £30k this year, will therefore only take home £8.4k after tax or £6.9k after tax and pension contributions - amounting to £700 or £575 a month. While this isn't negligible, it may leave some juniors wondering whether their 100-hour weeks were worth it. 

Have a confidential story, tip, or comment you’d like to share? Contact: sbutcher@efinancialcareers.com

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Photo by Jon Tyson on Unsplash

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