How much UK tax will banks pay on their profits?

Peering into the crystal ball, we wonder - how much corporate tax banks in the UK are going to have to pay after 1 April 2023? On that day, marking the first rate rise since 1974, the corporation tax rate goes up, from its current rate of 19% to the new rate of 25%.

For banks with taxable profits below £25 million for their accounting period, the answer is clear – the new 25% corporation tax rate will apply.

But banks with annual taxable profits above £25 million must also pay an additional ‘bank profits surcharge’, currently set at 8%. If this rate were to continue, it would bring the combined rate of corporation tax and bank profits surcharge to a massive 33% (25% CT + 8% BPS).

Bank profits surcharge brought in £2.1 billion for the Government in the year to March 2020, as compared with £2.5 billion for bank levy and £5 billion for corporation tax receipts from the banking sector. However, the Government appears not to wish to increase the burden of tax on bank profits. In his March 2021 Budget speech, Rishi Sunak, the Chancellor of the Exchequer, recognised that the 33% combined rate could make UK banks uncompetitive, internationally, so he announced a review of the rate of bank profits surcharge.

The question is, what will the promised review deliver? Two recent statements help to clear some of the mists of the crystal ball.

In his Mansion House speech on 1 July, the Chancellor said: “I announced at Budget that we’d review the bank surcharge. Our ongoing conversations have only reinforced my view that the combined tax rate on UK banking profits should not increase significantly from its current level. I intend to conclude the review as planned later this year.”

On 5 July, the Treasury published a policy paper ‘A New Chapter for Financial Services’. Under the heading ‘Protect the international competitiveness of the UK banking sector by reviewing the bank surcharge’, the policy paper states that an ‘internal review’ of the rate of the bank profits surcharge will set out how it will be ensured ‘that the combined rate of tax on banks’ profits does not increase substantially from its current level and that rates of UK taxation are competitive with major competitors.’

We can glean from this:

  • The review of the bank profits surcharge rate will be an ‘internal review’ within the Treasury, not a consultation;
  • Its result will be announced in the Autumn;
  • The combined rate of bank profits surcharge and corporation tax will not significantly exceed the current level of 19% (CT) + 8% (BPS) = 27%.

In truth, our crystal ball will not really tell us much, but we can try some political guesswork.

The Treasury’s review might propose any rate of bank profits surcharge that means the combined rate does not significantly exceed 27%. However, the language does not suggest that the Treasury wishes to reduce or match the current combined rate. If this interpretation is correct, it would tend to rule out a new bank profits surcharge rate of 2% or lower.

On the other hand, a new bank profits surcharge rate of 5% or more is possible, but that would mean a combined rate of 30% or more, which would not seem to match the Government’s aim of protecting UK banks’ international competitiveness. The Chancellor will therefore be mindful of corporate tax rates faced by banks in other countries, for example:

  • Australia: 30.0%;
  • France: 28.41%, falling to 25.825% as from 2022;
  • Germany: 31.925% for banks based in Frankfurt (or 30.175% if located in Berlin);
  • Japan: 31.78%.

In the United States, for example in New York, a bank would pay Federal, State and City taxes. Depending on whether the bank is a dealer in securities and where its income is sourced, the total tax rate on business income might range from 22.21% to 35.64% (although State and City taxes can push these aggregate rates higher if the capital-based tax exceeds the business income tax).

Potential host countries for corporate relocation of large banks are often perceived to be those with larger economies, such as those listed above, and with strong regulatory regimes. However, smaller countries with lower tax rates, such as Ireland, Luxembourg or Netherlands, may also be able to attract banking business. Consequently, the Chancellor will not wish to set the bank profits surcharge too high.

We might therefore foresee a new bank profits surcharge rate within a range of, say, 3% to 4%:

  • 3% would give a combined rate of 25% + 3% = 28% ­– a modest increase on the current combined rate of 27%;
  • 4% would give a combined rate of 25% + 4% = 29% – this halves the current rate of surcharge but keeps the combined total below 30%.

In the end, it is Parliament’s choice, not the Treasury’s, what taxes to levy and what tax rates to set. We will only know for sure once the relevant legislation is passed.