UK banks to be 'banded' for purposes of redesigned bank levy, says Treasury

If the new mechanism is adopted, it would come into force for chargeable periods beginning on or after 1 January 2015 and any necessary legislation would be included in the 2014 Finance Bill, according to this year's Budget document. The government's intention is that the overall amount raised from the sector would remain unchanged. Full details will be set out in the consultation paper, which will be published next week.

The bank levy was introduced as part of the 2010 Budget. It is an annual tax on the value of certain debts of UK banks. The rate of the levy was originally set at 0.075%, but has gradually increased to the current 0.156% effective from 1 January 2014. Banks are charged a percentage of their total liabilities over £20 billion minus ordinary deposits and government-backed bonds, with longer-term liabilities taxed at a lower rate.

According to the Budget statement, the government intends to consult on a new mechanism under which banks will be allocated into different 'bands' based on their chargeable equity and liabilities. Banks would then be charged an amount set for that band.

The government has also announced a number of changes to the levy, following a review into its "operational efficiency". From 1 January 2015, deposits will only be excluded from banks' total liabilities to the extent that they are covered by a deposit protection scheme. Derivative contracts will be treated as short-term liabilities while relief for a bank's High Quality Liquid Assets will be restricted to the rate applicable to long-term liabilities.