It’s hard to imagine in the current economic and geopolitical climate that highly paid bankers would rank amongst the list of people to have sympathy for, nonetheless, an eye-opening report on the tax contribution of the UK banking sector this week told us something important about the City in 2023.
Put simply, London appears to be losing ground amongst the world’s finance capitals – or, at least, that the City is less competitive when recruiting ‘top talent’.
The report suggests that, even though banking sector-specific tax charges was reduced by Rishi Sunak’s controversial decision to slash the banking surcharge from 8% to 3% (whilst chancellor in 2021), employment taxes on bankers still saw a substantial increase in the last financial year.
Employment tax receipts from bankers increased by 11.2% in the year, helped riven by the temporary 1.25 percentage point rise in national insurance.
The tally was also bloated by earnings growth in the sector that outsized tax thresholds, pushing more banking employees into the higher rate tax bracket - this is a phenomenon called ‘fiscal drag’.
It should also be noted that most of the £14.7 billion in employment taxes generated from the banking sector were paid by employees.
Taxes collected, being income tax deducted under PAYE and employee NIC, comprised 73% of this figure, with the remainder sourced from employers’ NIC and other levies.
It is perhaps a politically unpopular opinion, though it has drawn criticism from Andy Wiggins at PwC, the accounting firm that conducted the survey on behalf of UK Finance.
“The UK is currently on course to become a less competitive location for banks compared to other financial centres,” he told Bloomberg.
His comments come as taxes collected in the UK banking sector continue to increase on the back of higher corporation tax, despite the sector-specific bank surcharge falling from 8% to 3% this year.
The forecasts given the UK Finance indicate that in 2024, banks located in London will face a total tax rate of 45.5%, surpassing that of other leading financial hubs such as Frankfurt, Amsterdam, and New York.
“The UK banking sector is at the heart of the economy and this study shows that its contribution to the public sector continues to be significant,” Wiggins said. “Maintaining the competitiveness of the sector at a time of heightened geopolitical and economic disruptions is important in fostering economic growth and promoting greater investment into the wider UK economy.”
But how does this square with the very real sector-specific tax breaks given to, and the record profits generated by, the UK financial sector?
The Trades Union Congress (TUC) recently put out some data showing that the UK public purse is losing at least £29 million weekly due to a significant tax reduction for banks.
This loss, stemming from Rishi Sunak's decision as Chancellor to cut the bank surcharge from 8% to 3%, is estimated to cost the Treasury a minimum of £1.5 billion annually over four years.
The TUC criticised this move for depleting public finances and services, accusing banks of profiting from increased interest rates while public sectors like schools and hospitals suffer.
The TUC's new report suggests taxing banks' excess profits as a remedy. It proposes several options: reversing the surcharge cut to set it at 8%, raising it to 10%, implementing a 35% windfall tax surcharge, or restoring the bank surcharge and bank levy to their 2016/17 real-term revenue levels.
These measures could raise between £6 billion and £28 billion over four years, according to the TUC.
The UK's four largest banks reported over £41 billion in pre-tax profits for the first three quarters of 2023, nearly a 400% increase from the same period in 2020.
So it is unsurprising that public opinion strongly supports taxing excess profits, with TUC polling showing that 75% favour a windfall tax on banks (80% on energy companies, and 69% on large online retailers also).
Paul Nowak said: “At a time when our schools and hospitals are crumbling Rishi Sunak has given a huge tax break to banks.
“Banks have enjoyed eye-watering profits over the last year – and this tax cut means they have cashed in on soaring interest rates and families’ mortgage misery.
“The Prime Minister’s decision to reduce the surcharge has starved our public finances and our public services of much-needed funds at the worst possible time.
Evidently, the UK bank tax system is either too generous or not generous enough, depending on who you ask.