Reeves warned against bank tax raid
Rachel Reeves has been warned of the growth consequences of upping tax on lenders after a leaked memo from Angela Rayner called for the Chancellor to launch a cash grab on banks.
Reeves was sent a memo by the Deputy Prime Minister ahead of the spring Statement, which called for an annual £700m hike on the sector.
But the head of the banking industry body UK Finance has argued the sector already makes a “significant contribution” to the UK’s tax base, with its most recent report estimating total tax contribution to be £44.8bn in the 2023/24 financial year.
This was up 4.7 per cent from around £41bn the year prior. The 2023/24 contribution is also the highest on record since the study began a decade ago.
David Postings, chief executive of UK Finance, told City PM: “Banks based in the UK already pay a significantly higher rate of tax than those in New York and are expected to pay notably higher rates of tax than in other European capitals.”
British lenders are subject to an additional surcharge of three per cent, which sits on top of the standard 25 per cent in Corporation Tax.
A report UK Finance submitted ahead of the Autumn Budget found the sector’s total tax rate in London is 45.8 per cent for 2024. This dwarfed European rivals Amsterdam (42 per cent), Frankfurt (38.6 per cent) and Dublin (28.8 per cent).
Postings said: “The tax environment has an important bearing on investment decisions and growth. To make the UK’s approach to bank taxation globally competitive, we think the government should phase out the bank corporation tax surcharge and the bank levy over time.”
Rayner pressing Reeves to up banks tax
The move could be one that the Chancellor reconsiders in the Autumn Budget in a bid to protect her wafer-thin fiscal headroom. News the government is considering walking back on earlier cuts to winter fuel payments could pile extra pressure on Reeves to find fresh sources of tax revenue.
Rayner called for the surcharge tax on banks to be raised to five per cent.
The surcharge, which was introduced in 2016, serves as an overhang from the 2008 financial crisis, when banks received taxpayer-funded bailouts.
The rate sits on top of the 25 per cent corporation tax which companies pay.
It was originally set at eight per cent before being reduced to three in April 2023 when Corporation Tax increased.
Rayner’s fresh proposals, seen by The Telegraph, would effectively set Corporation Tax for banks at 30 per cent, which has spiked concerns about lenders ability for international competition.
British banks managed to skirt a tax hit in Reeves’ maiden budget in October after significant lobbying.
The Chancellor held corporation tax at 25 per cent but raised taxes by £40bn with changes to employer’s national insurance and inheritance tax.