Rishi Sunak is preparing to announce a tax cut for Britain’s biggest banks at next week’s budget to maintain the competitiveness of the City of London after Brexit, according to reports, despite plans to raise taxes on workers.
Ahead of the setpiece budget and spending review next week, the Financial Times said the chancellor planned to slash the corporation tax surcharge imposed on the banking industry by more than 60%, taking the levy from its current level of 8% to just 3% from April 2023.
The development comes after Sunak had warned the Conservative party conference this month that the time for tax cuts would need to wait until the public finances were back on a sustainable footing, amid record levels of government borrowing incurred during the Covid-19 pandemic.
Since the start of 2021, the chancellor has announced plans to raise taxes by £36bn a year – a bigger rise than at any budget since the mid-1970s – including plans to raise national insurance taxes on workers and businesses.
It also comes after the government slashed universal credit benefits from early October by more than £1,000 a year in the biggest overnight cut for social security benefits, in a development poverty campaigners warn would push more households into distress amid an unfolding cost of living crisis this autumn.
The chancellor announced a review of the banking industry surcharge at the spring budget, saying a planned increase in the main rate of corporation tax could put London at a disadvantage to other big financial centres such as New York and Hong Kong.
Corporation tax is set to rise from 19% to 25% from April 2023, which the Treasury said at the March budget “would make UK taxation of banks uncompetitive and damage one of the UK’s key exports”.
It comes amid concerns over the impact of Brexit on the City of London as large amounts of financial business continue to steadily drift to European financial centres, as well as to Asia and the US. Earlier this year, it emerged Amsterdam had overtaken London as Europe’s top share trading hub, raising questions over the future of the City and its contribution to the wider UK economy and the British exchequer.
The chancellor’s critics leapt on Sunak’s comments to the Tory party conference earlier this month, amid anticipation for a tough tax and spending settlement elsewhere at next week’s budget.
John McDonnell, the former shadow chancellor, said: “Sunak talked about morality in his conference speech, where’s the morality in cutting universal credit forcing more children into poverty whilst reducing the taxes on wealthy banks? Appalling judgment.”
Despite improvements over the past year as the economy recovers from Covid, the government is still on track to borrow £180bn in the current financial year, or about 7.7% of national income. Since the second world war, such a level has only been reached during the financial crisis and last year.
The banking surcharge was introduced by George Osborne in 2015 with the aim of ensuring a fair contribution from the banking industry after the then chancellor scaled back a separate levy on lenders’ balance sheets, and cut corporation tax for other firms to among the lowest levels in the western world. The levy raised £1.5bn in 2019.
Against the backdrop of heavy lobbying from the sector, Sunak dropped a heavy hint in his Mansion House speech in July that a fresh settlement was likely, saying that his ongoing conversations with banks had “only reinforced my view that the combined tax rate on UK banking profits should not increase significantly from its current level”.
A Treasury spokesperson said: “We do not comment on fiscal policy outside of budget.”