Yahoo Finance TSB and Co-op Bank among lenders set to benefit from £4bn City tax cut
TSB, Co-operative Bank and Leeds Building Society are among the lenders expected to escape a levy imposed on the sector, following the chancellor’s announcement of a £4bn City tax cut in his budget speech on Wednesday.
Rishi Sunak said the government would increase the proportion of profits exempt from the bank surcharge from £25m to £100m from April 2023. It means the first £100m of any bank’s earnings will avoid the sector-specific tax, which is also due to drop from 8% to 3% that year.
The Treasury confirmed that the more generous “allowance” would result in about 35 banking groups and buildings societies avoiding the surcharge altogether.
“A few names who the surcharge will no longer apply to include the likes of OakNorth, Tesco Bank, Secure Trust Bank and Shawbrook,” said John Cronin, a financials analyst at stockbroker Goodbody. “A few of the building societies will also fall out of the net.”
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Leeds Building Society, which reported profits of £80.7m in 2020, may also avoid the surcharge entirely, as may the Co-operative Bank, which is expected to report its first annual profit in more than a decade this year.
TSB could also benefit, depending on the pace of its recovery. The bank reported a £205m loss last year, but had profits of about £46m before the Covid crisis hit earnings.
A spokesperson for the Treasury said the government would not confirm which banks would end up exempt, due to taxpayer confidentiality.
However, Cronin said the threshold increase would be “highly beneficial for challenger banks more broadly, including those who have profits north of £100m. This is because the surcharge will only apply to the portion of profits in excess of £100m – and the challengers’ profits typically do not greatly exceed that level.”
The move is meant to help smaller banks compete with larger rivals including Lloyds, HSBC, NatWest and Barclays.
Meanwhile, the surcharge cut is intended to offset the rise in corporation tax from 19% to 25% scheduled for 2023. The Treasury said it would also ensure the UK can continue to compete with other financial sectors including New York and Germany, where the effective tax rates for banks are 26% and 32% respectively.
Together, the surcharge cut and the allowance increase will cost the Treasury about £4bn in the five years to 2027, according to the Office for Budget Responsibility’s forecasts on bank profitability.
Simon Youel, the head of policy and advocacy at campaign group Positive Money, said: “At a time when ordinary workers are facing a cost of living crisis, with cuts to universal credit, hikes to national insurance, and rising household bills, cutting taxes for bankers is a worrying sign of the government’s priorities.”
The shadow chancellor, Rachel Reeves, responding in the Commons to Sunak’s budget speech, said that “at least the bankers on short-haul flights sipping champagne will be cheering this budget”, alluding to the surcharge cuts as well as Sunak’s plan to cut tax on domestic flights and sparkling wine.
Anne Boden, the chief executive of digital lender Starling Bank, said she understood that a tax cut for banks was “never going to win widespread support”, but it meant Sunak recognised the fact that challenger banks were “elevating standards in consumer banking, forcing the old banks to raise their game and providing real benefits for consumers”.
A Co-operative Bank spokeswoman agreed, saying the increased allowance would help mid-tier banks “continue to offer healthy competition”.
The banking lobby group UK Finance said it welcomed the surcharge cut but urged the Treasury to keep the sector’s total tax rate under review. “This will ensure the UK continues to be an attractive place to do business, is globally competitive, and enables the sector to support the economic recovery and the net zero transition.”
