Goldman Sachs Group Inc , in the crosshairs of the pay debate, is capping compensation at $1.6 million for its partners in the UK, according to a source familiar with the matter.

Goldman last week reported a record annual profit, but answered critics by not recording any compensation expense in the fourth quarter while also making a $500 million charitable contribution.

The source was anonymous because pay is an internal matter.

Even with the shift, Goldman still paid out about $16 billion to employees for 2009, falling short of the record $20.2 billion from 2007.

Goldman executives said they were exercising restraint in making their pay decisions.

Goldman's 5,500 UK staff were expecting to see pay restrained in the wake of Britain's 50 percent tax on bonuses over 25,000 pounds ($40,810) announced late last year.

(Reporting by Steve Eder; Editing by Phil Berlowitz)