Government increases rate of planned bank tax

The Government has upped the rate of its planned tax on Britain's banks, draft legislation revealed today.

The Treasury outlined in today's draft Finance Bill 2011 that it will increase the rate from an initially proposed 0.04% to 0.05% in its first year from January 1 2011 and up from 0.07% to 0.075% in subsequent years.

The bank levy, which will apply to the global balance sheets of UK banks and the British operations of foreign firms, is designed to repair some of the damage caused by banks in the financial crisis.

A consultation paper on the proposed bank tax also confirmed lenders with a balance sheet of less than £20 billion will be exempt from the tax. It is expected to raise £2.6 billion a year by the end of 2012.

Mark Hoban MP, financial secretary to the Treasury, said: "We have consulted on the design of the scheme so that it achieves two objectives.

"First, ensuring that banks make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy.

"Second, the final scheme design will encourage the banks to make greater use of more stable sources of funding, such as long-term debt and equity, working with the grain of our wider reform programme."

The levy will replace the Labour Government's one-off bonus tax introduced earlier this year, which charged 50% on all windfalls above £25,000 - raising over £2 billion.

But there are fears the bank levy could impact the UK's competitiveness.

The draft legislation said the Treasury would have the power to offer tax relief to those banks that faced double taxation, because they operate in other countries where the levy applies.

But a spokesman for the British Bankers' Association said: "We remain very concerned about the effect of the bank levy on the international competitiveness of the UK.

"We believe that urgent steps are required to prevent the multiple charging of bank levies on multinational banks. Failure to act swiftly would further damage the reputation of the UK as a global financial centre."

The legislation comes as UK bank bonuses are firmly back in the spotlight.

It has been reported that Britain's bank bosses are planning to accept their bonuses for the first time in two years, taking home a combined payout of up to £15 million.

But the same bosses are said to be engaged in behind-the-scenes talks over a joint plan to cut the pooled bonus pot ahead of January's bonus round.

Chancellor George Osborne said the "unusual" step of setting a rate to raise a certain sum showed he was not being soft on banks, despite failing to produce Government action to curb bonuses.

He told journalists at a Westminster lunch: "We are absolutely clear that the banks need to make a contribution.

"When it comes to bonuses, my message to the banks is very simple: reflect upon the economic situation that this country is in; reflect upon the fact that many different parts of our country are having to accept some difficult decisions; look around you and the world you live in before you make your decisions on bonuses."