The Chancellor may end up taking about £300 million less than expected in income tax from City bonus payouts this year because of the rise in the popularity of banks awarding tax-efficient restricted share awards, according to Ernst & Young, the auditor.

The bonus pool is expected to total £7.4 billion, the second-best year despite the credit crunch. Banks are, however, paying a greater proportion in restricted stock and share options - often up to 50 per cent of bonuses, twice the proportion from last year.

While ordinary shares and cash attract tax at the ordinary rates, employees can negotiate paying a discounted rate of tax on restricted stock if they pay for those shares upfront rather than waiting for the shares to vest, thus compensating them for the risk that those shares may fall in value.

Graham Farquhar, partner in charge of employer services at Ernst & Young, said that he expected most would prefer to pay less now, hopeful that with bank stocks trading at long-time lows they will make tax-efficient gains over the next few years as the restrictions over the stock awards come off.

HM Revenue & Customs may also have been betting that this year thousands of bankers would exercise share options in their firms granted to them during bonus payouts two or three years ago, triggering an opportunity to tax. With the prices of most bank shares having fallen over the past few months, most will now be deferring exercising those options.

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