The miraculous Bank Levy

March 02, 2015 12:08 PM

The Liberal Democrats have announced another tax increase with a predictable target – banks.

Danny Alexander’s latest grab is lazy, but perhaps he’s hoping that additional revenue may at least offset the reduction in revenue that Nick Clegg’s Capital Gains Tax increase will cause.

The current Bank Levy is a tax on the value of debts of UK banks with a few exceptions:

  • Deposits that are protected by the Financial Services Compensation Scheme (“FSCS”)
  • Deposits protected by an overseas deposit protection scheme, which is comparable to the FSCS
  • Deposits protected by an explicit government guarantee

It is routinely espoused as a potential source of huge revenues by politicians of all parties, but it has repeatedly failed to raise the revenue the Treasury says it will.

Despite a 100 per cent increase in the Bank Levy since its introduction, revenues for 2013-14 were still short of what was forecast at the 2010 Budget. The tables below show just how wrong the Treasury have been at forecasting revenues from this tax.



The principal reason for these dramatic shortfalls is that banks have been deleveraging their balance sheets since the crisis. So to chase his arbitrary target of raising £2.5bn a year from the tax, the chancellor has to keep raising the rates.

And whilst banks like HSBC and Barclays might not be particularly popular at the moment, they are blue chips in which many UK pension funds have large shareholdings. Additional taxes mean lower dividends and smaller pension pots.

It's too easy for politicians to claim to pay for electoral promises by promising higher taxes on probably the most unpopular industry other than their own. And whilst you might have little sympathy for those working in financial services, politicians must rise above the current climate and base policies on facts.

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