Banking surcharge to reduce to 3 percent
The Chancellor has confirmed a reduction in the banking surcharge rate from 8 to 3 percent with effect from 1 April 2023.
The Chancellor has confirmed a reduction in the banking surcharge rate from 8 to 3 percent
The Chancellor has confirmed a widely expected reduction in the banking surcharge rate, levied on the profits of banking companies, from 8 to 3 percent with effect from 1 April 2023. There will also be an increase in the surcharge allowance available to banking groups from £25 million to £100 million. This follows a Government review of the surcharge announced at the Spring Budget in March 2021 to ensure UK taxation of banks does not become uncompetitive in light of the increase in the headline rate of corporation tax from 19 to 25 percent from 1 April 2023. The cut in the banking surcharge rate means that banks will broadly pay tax on their profits (above the surcharge allowance) at a rate of 28 percent from 1 April 2023 which reflects a one percent increase on current tax rates (19 percent headline rate plus 8 percent surcharge).
As the UK corporation tax rate declined in the decade following the financial crisis, various amendments were made to taxes charged specifically on the banking sector in order that (among other stated objectives) the financial contribution made by the sector would be maintained – i.e. that the potential benefit of the rate cuts would be effectively negated. Those amendments included a series of increases in the bank levy and then the introduction of the bank surcharge as the scope of the levy was reduced.
Given this background it was unsurprising that the decision to dramatically reverse years of cuts in the corporation tax rate should prompt a review of the additional tax collected through the surcharge and of whether a combined headline rate of 33 percent could harm UK competitiveness – particularly given the ongoing debate on the impact of the post-Brexit environment on decisions by global banking groups on where to locate new business.
That the review would result in a significant cut in the surcharge to compensate for the corporation tax increase was widely expected, with recent speculation instead focussing on the amount of the cut and whether the Government would take the opportunity to make broader changes to bank taxation.
By opting for a reduction to 3 percent, the Government is allowing the combined headline rate for banks to increase from 27 to 28 percent – although whether this translates to an actual increase in the tax payable by a given bank is a more complicated question, as discussed below. Discussions as to the implications of this new rate for the UK’s competitiveness will inevitably involve comparisons with the US, particularly as the likelihood of the US rate similarly increasing to 28 percent appears to have diminished in recent weeks.
For many multinational banking groups, however, the ongoing complexity of the various UK bank specific regimes is a more prominent concern than a slight increase in the combined rate. Significant changes to bank taxation are often politically controversial, so the decision to limit the proposed changes from the review to a simple reduction in the surcharge rate is understandable but one that will inevitably be viewed by these banks as a missed opportunity for wider reform.
The change to the allowance will increase the amount of profits that banks can make before they start to pay the surcharge. This will benefit smaller ‘challenger’ banks who, as noted by KPMG and others, would otherwise likely have been losers from the changes. This is due to differences in the way the surcharge is calculated compared to mainstream corporation tax (principally the surcharge allowance and also less generous loss relief) and banks in this segment of the market will typically benefit less from the reduction in rate of surcharge than larger, well-established banks.
The surcharge reduction will be legislated for in the upcoming Finance Bill, due to be published on 4 November 2021 and likely to be substantively enacted in the early part of 2022. This means that for the majority of banks which will be drawing up accounts to 31 December 2021, those accounts are likely to reflect the increase in corporation tax (enacted earlier this year) but at most only disclose the anticipated impact of the compensating fall in surcharge.
If you would like to discuss the impact of the new banking surcharge rate for your business, please speak to your usual KPMG in the UK contact.