Rishi Sunak will slash a tax surcharge on bank profits by more than 60 per cent in next week’s Budget in an effort to keep the City of London competitive on a global scale in the wake of Brexit.
The chancellor will cut the surcharge from 8 per cent to 3 per cent from April 2023, according to people briefed on the Budget, as he seeks to keep banking activity in the UK in an era of higher corporation tax rates.
Sunak announced in his March Budget plans to raise general corporation tax rates from 19 to 25 per cent from 2023. However, he admitted that if the current top-up rate continued this would “make the taxation of banks uncompetitive and damage one of the UK’s key exports”.
Banks currently pay tax at a rate of 27 per cent on their profits, comprised of 19 per cent corporation tax plus the 8 per cent surcharge. The rate is broadly in line with other financial centres including New York and Paris.
The chancellor will say that unless he reduced the surcharge, the overall UK corporation tax rate for banks after 2023 would have been uncompetitive, with banks facing a combined rate of 33 per cent. Instead, from 2023, their combined rate will rise slightly to 28 per cent — 25 per cent corporation tax plus a 3 per cent surcharge.
Sunak will argue that the UK is the only big financial centre to levy a specific surcharge on bank profits. The City of London claims that the financial services sector — including its staff and customers — contributes £75.6bn a year in tax.
A Treasury spokesman said: “We do not comment on fiscal policy outside of Budgets.”
Last month John Glen, City minister, signalled the cut to the surcharge when he told the Financial Times: “To be competitive, we have to have competitive tax rates — and that’s what’s on the chancellor’s mind.”
That followed a pledge from Sunak in March to review the 8 per cent surcharge on the sector, which was originally introduced by former chancellor George Osborne in 2015.
The move will be welcomed by the financial sector, which has lobbied heavily against the surcharge on profits over £25m since its introduction. Last year, the top-up raised £1.5bn.
The chancellor’s colleagues said he was looking in his October 27 Budget to ensure banks continued to pay their fair share while maintaining competitiveness and protecting jobs.
However, Sunak could face criticism from opposition politicians for cutting the bank tax surcharge at a time of tight public finances. This month, a temporary £20-a-week uplift in universal credit was scrapped.
Thousands of jobs and more than a trillion pounds of assets have relocated to rivals such as Frankfurt, Paris and New York since the UK lost unrestricted EU market access at the start of the year.
Amsterdam has already overtaken the City as the top venue for trading euro-denominated shares and derivative contracts and a spat has broken out over whether EU banks should continue to rely long-term on the UK’s vast clearing houses.