UK banks brace for Budget tax raid despite lobbying efforts
An influential lobby group has warned that UK banks are paying a significantly higher rate of tax than counterparts in the US and EU as the sector braces for a tax raid in Labour’s maiden Budget.
Britain’s banking sector paid an estimated £44.8bn in taxes during the 2023/24 financial year, according to a report by trade body UK Finance and PwC.
That number marks a 4.7 per cent increase in tax receipts compared to a year earlier, which saw banks pay an estimated £41bn.
The 2023/24 contribution is the highest since the annual study began a decade ago. It represented 4.7 per cent of total UK government tax receipts during the year.
Top bankers are expecting Chancellor Rachel Reeves to raise taxes on the sector in her inaugural Budget next Wednesday, which would likely be considered a windfall tax.
The industry, which enjoyed record profits on the back of higher interest rates last year, is considered an easy target for a tax raid as Labour scrambles to fill an alleged £22bn “black hole” in the public finances.
How are UK banks taxed?
While the UK has not implemented a bank windfall tax, it has charged a bank levy since 2011. The levy applies to lenders’ balance sheet liabilities and equity.
The Office for Budget Responsibility expects the levy, introduced in response to the financial crisis, to raise some £1.4bn in the 2024 fiscal year.
Since 2021, short-term liabilities have been taxed at 0.1 per cent, down from 0.21 per cent in 2015. Long-term liabilities are taxed at 0.05 per cent, compared to 0.11 per cent in 2015.
Banks also pay a corporation tax surcharge on their profits, which was introduced in January 2016.
The tax was cut to three per cent from eight per cent last April. However, a rise in wider corporation tax to 25 per cent, from 19 per cent, brought banks’ total rate up to 28 per cent, from 27 per cent.
UK Finance found Britain’s banking sector contributed £10.8bn in corporation tax in 2023/24, including the surcharge. This represented 12.2 per cent of the government’s total corporation tax receipts.
The total figure comprised £24.1bn in taxes borne, including corporation tax and the bank levy, and £20.7bn in taxes collected, including income tax and employee national insurance contributions.
The UK’s position on the world stage
In its pre-Budget submission published earlier this month, UK Finance reiterated calls for the bank levy and corporation tax surcharge to be phased out altogether.
The group argues this would bring the UK’s total tax rate into line with other competitor jurisdictions.
Monday’s report found the sector’s total tax rate in London is 45.8 per cent for 2024. This is higher than rival EU financial centres like Amsterdam (42 per cent), Frankfurt (38.6 per cent) and Dublin (28.8 per cent).
UK Finance said the variation was driven by the UK’s continued use of the corporation tax surcharge and bank levy in contrast to relaxations seen in the EU.
The bloc scrapped its European Single Resolution Fund, an emergency rescue pot funded by mandatory contributions from lenders, after it reached its target level earlier this year.
New York had a 27.9 per cent total tax rate, with UK Finance urging the government to consider how taxes affect Britain’s competitiveness.
“Banks based in the UK pay a significantly higher rate of tax than those in New York and, because contributions to the EU’s Single Resolution Fund have now been suspended, they are expected to pay notably higher rates of tax than in other European capitals,” said chief executive David Postings.
“The overall tax environment has an important bearing on investment decisions and growth and is something that needs to be considered in terms of our international competitiveness.”
He added that the banking sector “supports a large number of skilled jobs across the country and is a key contributor to economic growth”.
Since the general election, the Treasury has neither committed to nor ruled out tax hikes on the sector. A spokesperson said Reeves had “been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy”.