Despite increasing pressure from lobby groups and trade bodies, including the City of London, the UK banking and financial services sector could find itself at the eye of the Autumn Budget storm next Wednesday.
Last month, lobby group UK Finance went on the offensive, stating that banking profits lift all ships (to paraphrase the group) and that this “should be considered in terms of taxes on banks in the UK”.
But given that Labour Chancellor Rachel Reeves has not ruled out additional tax burdens on the lucrative UK banking sector, these pleas could be falling on deaf ears.
What taxes are at stake?
The bank levy was introduced in 2011 to reduce risky funding models after the 2008 financial crisis.
It is charged on the balance sheet equity and liabilities of banks, meaning it does not depend on profits.
According to the ‘2024 Total Tax Contribution of the UK banking sector’ report compiled by UK Finance and PwC, the bank levy made up 6.6% of all taxes borne by the banking sector in the 2023/24 tax year.
That’s £1.4 billion in raw numbers.
Banks must also pay the sector-specific bank surcharge, which was introduced in 2016 as a windfall on the sector’s profits.
It was initially 8% but has since decreased to 3% in response to corporation tax increases. In 2023/24, banks paid £1.5 billion in bank surcharges.
Banks are also not allowed to reclaim VAT on purchases- this amounted to around £4.6 billion in additional tax take from the sector in 2023/24.
When these sector-specific taxes are tallied up, they accounted for £7.5 billion in the last tax year, which is 31.1% of the total taxes borne by the banking sector.
Thanks to these sector-specific taxes, which as a reminder must be paid on top of corporation tax, the total tax rate (TTR) for banks in London stands at 45.8%, which is notably higher than other financial hubs such as New York (27.9%), Frankfurt (38.6%), Amsterdam (42.0%), and Dublin (28.8%).
That is objectively high- but there is every possibility it could get higher.
The biggest shoulders
Reeves reportedly wants to find some £40 billion in additional taxes in the Autumn Budget, but there are limited options.
Labour has pledged to keep income taxes where they are, which is beneficial to the average Brit if you ignore the effect of fiscal drag. Labour has also pledged to keep national insurance, VAT and corporation tax unchanged.
This makes wealth taxes, like capital gains tax and inheritance tax, prime candidates to shoulder the burden, but a bank-specific tax hike would not be a curveball either.
If you ask Lloyds Banking Group PLC (LSE:LLOY)’s chief finance officer William Chalmers, it’s fair for banks to shoulder this burden, but not at the expense of growth.
Speaking to reporters on Wednesday, Chalmers said: “It is important to have a competitive, a stable tax regime to encourage the type of investment, and indeed the type of lending, that we would seek to do to promote the growth agenda.
“We do in that context look forward to the Budget with the clarity that it will provide. And we note the government’s commitment to growth and very much hope that the Budget is going to be consistent with that agenda.”
“We take some pride in making our contribution to the society of which we’re a part,” added Chalmers, while noting that banks “are one of the UK’s largest taxpayers already”.
Unlike inheritance tax, banking taxes are unlikely to feature in a list of Britain’s most-hated taxes.
The banks could find themselves making an even greater contribution from next week.