Budget 2015: Bank levy to increase to 0.21%

The bank levy, an annual tax on the value of all the debts in UK banks, is to be raised from 0.156% to 0.21%.

"This will raise an additional £900m a year," said Chancellor George Osborne in his Budget statement.

The levy was first introduced in 2011, not only to raise money, but also to discourage banks from risky borrowing.

The rate was set at 0.05% and has now increased nine times since. The new rise will be in the 2015 Finance Bill and takes effect on 1 April.

The first £20bn of banks' borrowing is exempt from the levy, as are ordinary retail deposits, which are guaranteed by government debt.

The banks also only pay half the tax rate on their long-term debts.

'Anti-competitive'

The move is envisaged as bringing in an extra £685m in 2015-16, £925m in the next two following years and £920m in the two years after that.

However, there was criticism of the move, with bankers' body the BBA saying it would "impose a significant cost on banking businesses in the UK". The BBA said it would make banks move work and jobs to other parts of the world, while "deterring international banks from investing in the UK".

BBA chief executive Anthony Browne said: "Banks in the UK already pay more than £40bn in taxes each year, helping to fund schools and hospitals across the country.

"This [levy increase] will also further disadvantage UK headquartered banks by increasing tax on their overseas activities, while their competitors in those markets do not pay this tax at all."

Meanwhile, Anna Anthony, a taxation expert at Ernst & Young, said that the move represented a three-fold hike in the bank levy in four years and was "anti-competitive for our own UK banks".

She added: "It will hit UK headquartered banks hardest, as it's a tax on their entire global balance sheets, whereas foreign banks in the UK are only taxed on their UK liabilities.

"The constant tinkering with the tax regime for banks in the UK is unhelpful and, in the long term, unsustainable - the industry will definitely be looking for a commitment to a more certain tax environment in the future."

And Matthew Barling, PwC banking tax partner, said: "Today's announcement will be a blow to the UK banking industry. For a sector already under pressure in terms of profitability as a result of regulatory change and other demands, a further £900m increase in the bank levy will be felt acutely."

Half rate

The levy was originally introduced to ensure the banking sector made a "fair contribution" to the UK economy, as well as to reflect the risk the sector "poses to the financial system and the wider economy".

Initially, a target of £2.5bn a year was envisaged as being raised via the levy. However, it raised just £1.6bn in 2011-12 and 2012-13 and £2.2bn in 2013-14, as bank balance sheets have shrunk.

Mr Osborne added: "We will also stop banks from deducting from corporation tax the compensation they make to customers for products they have been mis-sold, like PPI [payment protection insurance].

"Taken together, these new banking taxes will raise £5.3bn across the forecast."