Warned of Unlawful Bank Taxation Heist
Rachel Reeves has received a warning on the potential repercussions of enhancing tax on lenders, following a leaked memo from Angela Rayner urging the Chancellor to implement a tax grab on banks.
Reeves received a memo from the Deputy Prime Minister ahead of the spring Statement, advocating for a £700 million yearly hike on the sector.
However, David Postings, the chief executive of UK Finance, has countered the sector's considerable contribution to the UK's tax base. UK Finance's latest report estimates the total tax contribution to be £44.8 billion in the 2023/24 financial year, up 4.7% from approximately £41 billion the previous year. The 2023/24 contribution is also the highest on record since the study commenced a decade ago.
Postings told City AM that British banks, based in the UK, already pay a noticeably high rate of tax compared to their counterparts in New York and other European capitals. The tax environment significantly influences investment decisions and growth. To render the UK's approach to bank taxation globally competitive, Postings suggests the government should gradually phase out the bank corporation tax surcharge and the bank levy over time.
British lenders are subject to an additional surcharge of three per cent, along with the standard 25% in Corporation Tax. A report submitted by UK Finance ahead of the Autumn Budget reveals the sector's total tax rate in London is 45.8% for 2024, surpassing European competitors like Amsterdam (42%), Frankfurt (38.6%), and Dublin (28.8%).
Rayner has called for an increase in the surcharge tax on banks to five per cent. The surcharge, introduced in 2016, serves as a legacy from the 2008 financial crisis when banks received taxpayer-funded bailouts. Originally set at eight per cent before being reduced to three in April 2023 when Corporation Tax increased, the current rate translates to a Corporation Tax for banks of 30%, raising concerns over their international competitiveness.
British banks were able to bypass a tax hit in Reeves' inaugural budget in October due to significant lobbying. The Chancellor kept the Corporation Tax at 25% but raised taxes by £40 billion with changes to employer's national insurance and inheritance tax.
These discussions come as the government is contemplating reversing earlier cuts to winter fuel payments, placing additional pressure on Reeves to find new sources of tax revenue. Rayner's fresh proposals could be reconsidered in the Autumn Budget as a means to protect Reeves' slim fiscal headroom.
Increasing the bank surcharge could generate additional revenue for the government, potentially aid financial regulation, and align with public sentiment regarding the banking sector's contribution to the public purse. However, it could make British banks less competitive internationally, potentially discouraging investment and risking the loss of business to other financial centers. Higher taxes on banks might also lead to increased costs for consumers and businesses, negatively impacting economic growth and consumer spending.
- Rachel Reeves received a memo from the Deputy Prime Minister advocating for a significant increase in tax on lenders, suggesting a £700 million yearly hike on the sector.
- David Postings, the chief executive of UK Finance, has countered the sector's potential tax increase, highlighting their considerable contribution to the UK's tax base, estimated at £44.8 billion in the 2023/24 financial year.
- British lenders are already paying a high rate of tax compared to their counterparts in New York and other European capitals, with a total tax rate in London of 45.8%, according to a report submitted by UK Finance.
- Angela Rayner has called for an increase in the surcharge tax on banks to five per cent, which could generate additional revenue for the government but might make British banks less competitive internationally.
- These debates over bank taxes come at a time when the government is reconsidering earlier cuts to winter fuel payments, increasing pressure on politicians like Rachel Reeves to find new tax revenue sources, such as the proposed bank surcharge increase.
