Summer Budget: new UK bank profit tax will address competition concerns, says chancellor

The announcements come as part of a "long-term roadmap" for banking tax reform, designed to "take account of the very significant improvements in banking sector regulation and underlying profitability" since the levy was first introduced in 2011, according to the government's Summer Budget. The rate of the overall levy will be gradually reduced from 0.21% to 0.1% between 2016 and 2021, and UK banks' overseas subsidiaries excluded from the levy entirely from January 2021.

The government said that the changes would increase UK banks' contribution to the country's finances by around £2 billion by 2021, while also developing "a more competitive and sustainable model for raising revenue from the banking sector over the longer term".

Banking reform expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that the announcements showed that the government was taking a "pragmatic approach" to growing concerns from industry body the British Bankers' Association (BBA) about the impact of regulatory cost burdens on the competitiveness of UK banks.

"However, banks will still face a 'double-whammy' from the phasing out of the levy and the introduction of the surcharge," he said.

The bank levy is an annual tax on the value of certain balance sheet assets held by UK banks, as well as the UK operations of foreign banks. It was introduced in 2011 at a rate of 0.05% as part of the UK's response to the international financial crisis, but has gradually increased to its current 0.21% rate. The levy applies to banks' liabilities above a £20bn threshold, except to ordinary deposits and government-backed bonds. Longer-term liabilities are taxed at a lower rate, currently 0.105%.

The government intends to reduce the levy rate from 0.21% to 0.18% from January 2016. It will then fall to 0.17% from January 2017, 0.16% from January 2018, 0.15% from January 2019, 0.14% from January 2020 and 0.10% from January 2021. The scope of the levy will also change from 1 January 2021, so that it is only charged on the UK balance sheet liabilities of UK headquartered banks.

The new tax on banking sector profit will be introduced on 1 January 2016 at a permanent rate of 8%.

From 1 January 2016, UK banks will be entitled to claim relief against their bank levy liabilities in respect of payments made to the Eurozone Resolution Fund, reflecting the government's "general policy on avoiding double imposition", according to the Summer Budget document. As of 8 July 2015, they will no longer be able to deduct the costs of compensation payments from their profits for the purposes of calculating corporation tax liability, as announced during the March 2015 Budget.

According to the Summer Budget document, the changes will mean that banks' total liabilities "will be increasingly aligned with profit and capital accumulation, reducing the risk of tax constraining lending or influencing banks' decisions on the location of internationally mobile activities".

"It also means that banks' contributions will be increasingly linked to activities within the UK, helping to reduce the impact of tax on the competitiveness of UK banks' overseas operations and helping to reflect the ongoing impact of regulatory reform and resolution planning in reducing the risk of these operations to the UK economy," the document said.

In its pre-Budget submission to the UK Treasury, the BBA urged the government to reform the bank levy in order to help improve the UK's "tax competitiveness". The industry body has commissioned Sir Hector Sants, former chair of the Financial Services Authority (FSA), to review UK banking competitiveness, and intends to present his findings to the government in autumn.