ECONOMY

Tax surcharge on UK bank profits cut to 3% in Budget

Chancellor Rishi Sunak confirmed plans to slash a tax surcharge on bank profits by more than 60 per cent in the Budget, as the UK government acts to protect the City of London’s global position after Brexit.

On Wednesday, Sunak said the surcharge will fall to 3 per cent from the current 8 per cent rate in April 2023. He added that the profit threshold at which banks will start paying the top-up would rise to £100m from £25m in order to help smaller challenger banks and increase competition.

The move is designed to partially offset a planned increase in corporation tax, which lenders argued would boost the burden on the sector to such an extent that Britain would become an unattractive place to be based.

This is a sensitive issue for London as thousands of jobs and more than a trillion pounds of assets have already relocated to rivals such as Frankfurt, Paris and New York since the UK lost unrestricted access to EU markets after Brexit.

In recent months, European regulators and politicians have become more forceful in their demands for international banks to beef up their EU operations at the expense of London.

The chancellor justified the surcharge cut by saying it would “ensure that banks continue to pay their fair share of tax, while maintaining the UK’s financial services competitiveness and safeguarding British jobs and tax revenue”.

However, he was criticised by his political opponents for slashing rates for banks at a time when spending on social care is being cut. For example, this month a temporary £20-a-week uplift in universal credit was scrapped.

The decision is a success for the banking lobby, which has persistently opposed the surcharge since its introduction by former chancellor George Osborne 2015. Last tax year, it raised £1.5bn.

“Let’s face it, a tax cut for banks is never going to be popular, but these measures recognise the fact that challenger banks are forcing the old banks to raise their game and providing tangible benefits for consumers,” said Anne Boden, chief executive of start-up Starling Bank. “Naturally we welcome them.”

In March, Sunak announced plans to raise the general corporation tax rate from 19 to 25 per cent from 2023. Banks currently pay tax at a rate of 27 per cent on their profits, comprising 19 per cent corporation tax plus the 8 per cent surcharge. That rate is broadly in line with other financial centres including New York and Paris.

Reducing the surcharge from 2023 will stop banks’ rate jumping to 33 per cent, but the chancellor said what they pay will still increase slightly to 28 per cent — 25 per cent corporation tax plus the 3 per cent surcharge.

“This move recognises the importance of an internationally competitive sector,” said David Postings, chief executive of lobby group UK Finance. “Given the overall tax position of other global financial centres, we urge HM Treasury to keep the banking and finance sector’s total tax rate under review.”

In lobbying for a lower tax rate, the City of London claimed that the financial services sector — including its staff and customers — contributes £76bn a year in tax.

Aside from the surcharge, lenders are also subject to a “bank levy” — introduced in 2011 following the financial crisis — which is a 0.1 per cent charge on their UK balance sheets. This raises a further £2.3bn annually.

In her response to the Budget, shadow chancellor Rachel Reeves criticised Sunak’s decision and said that it was inappropriate to reduce taxes when “bankers’ bonuses are set to reach a record high this year”, as dealmaking and trading surged to record levels.

“The chancellor is loading the burden on working people,” she added. “At least the bankers on short-haul flights, sipping champagne, will be cheering this Budget today.”

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