Banks may not escape the rush to find new taxes. I set out the options and the dangers, as I strongly urge the Chancellor to cut the deficit by spending less, not by taxing more. Banks currently pay two special taxes on top of Corporation Tax. They pay a Corporation tax surcharge of 3% on…
Banks may not escape the rush to find new taxes. I set out the options and the dangers, as I strongly urge the Chancellor to cut the deficit by spending less, not by taxing more.
Banks currently pay two special taxes on top of Corporation Tax.
They pay a Corporation tax surcharge of 3% on profits above £100 m, so a combined rate of 28%. This surcharge was at 8% when CT was lower. This raised £1 bn last year.
They pay a levy on balance sheets, 0.1% of short term liabilities and 0.05% of long term liabilities. This raises £1.3 bn.
They deposit money with the Bank of England to finance the Bank’s bond portfolio, currently at £554 bn. They get the 4% base rate on these reserve deposits, an income of £22 bn, around the size of the black hole.
Government options
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Remove all interest from reserves, cutting Bank of England losses by £22 bn
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Remove interest from minimum reserves needed as the ECB does. Bank said they need minimum reserves of £325 bn (low end of range). So that saves them 4% on £229 bn or £9 bn.
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Pay a lower rate on reserves to give Bank a spread between its lending and borrowing rates. E.g 0.5% less or £2.75 bn
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Double Bank levy raising £1.3 bn
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Return Corporation Tax surcharges to 8% raising around £2 bn
Removing all interest raises big money.The Bank should argue this would damage money policy as removing £22 bn of income from banks will greatly restrict their ability to lend and could tighten policy into recession. Limiting interest to surplus reserves saves substantial money and would be the compromise the Bank would probably agree and defend. It would still be a substantial tightening with recession risk lowering other tax receipts substantially
from the APF
This is the OBR March 2025 table about Bank of England losses. They forecast the Treasury paying the Bank £17.9 bn this year, £23.1 bn 2026/7, £22.3 bn 2027/8, £24.2 bn 2028/9, and £21.2 bn 2029/30 to pay for the losses.
Chart 6.6: Projection of cumulative flows to and from the APF
Combination bar and line chart showing the forecast of cumulative flows to and from the APF.
Combination bar and line chart showing the forecast of cumulative flows to and from the APF.
The losses are both losses on the capital value of bonds on sale or repayment and interest losses. The capital losses are dominant, running from £17.6 bn next year to £22.5 bn in 2028/9. The capital losses are biggest on selling longer dated bonds in the market. The Bank does not have to do this and no other Central Bank does it. It could hold them to repayment when the losses will be much lower as current prices are well below repayment value.
Since the March forecast the Bank has announced some reduction of sales especially of long dated bonds where the losses are biggest which will reduce these loss figures a bit.
I have long been recommending no market sales of bonds which lock in these losses.I do not propose new or extra bank taxes given how sluggish the economy is.
