UK bank surcharge: legacy tax is ripe for whittling away

UK tax updates

The UK government is readying the ground to trim its 8 per cent bank surcharge. A reduction in next month’s Budget would signal partial rehabilitation for the nation’s banks. The 2008 financial crisis for which they were partly responsible dug a £137bn hole in the public purse. 

The optics would still be bad. The government would be relieving banks of taxes while demanding more from workers (aka voters) and cutting the uplift to welfare payments.

Even so, it is right to start calling time on the banking surcharge. Taxation should be broad and simple. Sectoral levies, in contrast, distort capital allocation and politicise investments.

HM Treasury cannot be too munificent. Spending requirements are likely to exceed income growth. Resurgent inflation and higher interest rates will take a further toll. Chancellor Rishi Sunak reckons that a 1 percentage point rise across interest rates adds £25bn to the cost of debt servicing each year.

The surcharge and a balance sheet-based bank levy mean banks paid a total tax bill of £39.6bn last year, according to UK Finance, the industry’s trade body. Its extrapolations show that banks provided more than a 20th of total government receipts.

To put that in the context of the financial crisis, just £37.3bn of the original bailout bill remained outstanding as at the end of January. Only one bank — the rebranded NatWest — remains partly in government hands.

Regulatory overhauls mean banks have plenty of buffer capital. Chances are that the 3,000-odd financial institutions contributing to Europe’s Single Resolution Fund — a lifeboat likewise set up in response to 2008 — will be off the leash in 2023.

UK banks already pay more than peers. The tax burden is set to rise, as it is for all sectors, with the increase in corporation tax from 19 per cent to 25 per cent and higher national insurance charges. The Laffer Curve shows increasing taxes beyond threshold levels reduces the take. Higher corporation tax should be a cue to cut sectoral levies.

The Lex team is interested in hearing more from readers. Please tell us what you think of the banking levy in the comments section below

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