Government plans to raise £2.5bn with bank levy

Britain's banks will pay an extra £2.5 billion in tax a year by 2012 under draft legislation published today in a Government move to repair some of the damage caused by their role in the financial crisis.

The levy will apply charges to the global balance sheets of UK banks and the British operations of foreign firms, the Treasury said.

Unveiling the legislation, Mark Hoban MP, financial secretary to the Treasury, said the levy would not just raise money but "encourage less risky funding".

He said: "The scheme achieves two objectives: firstly, ensuring that banks make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy.

"Secondly, the final scheme design incentivises banks to make greater use of more stable financial sources, 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.

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 the British Bankers' Association warned the levy would have a significant impact on the more than 200 overseas banks operating in the UK.

It said: "Questions are being raised about the UK proposing to apply tax to a global balance sheet.

"The Treasury's statement is largely silent on how this levy would interact with taxation in other countries. Until this is clearer, some banks could be taxed multiple times by multiple jurisdictions on the same activities.

"There is also no international consensus on how banking activities should be taxed - the G20 members still hold very different views."

Revealing his highly anticipated spending review yesterday, Chancellor George Osborne also confirmed all UK banks would be asked to sign up to a tax code of conduct by the end of next month.

So far, only four out of 15 banks have signed up to the code under which they agree not to design avoidance schemes to reduce their bills or those of their clients. Part-nationalised banks Royal Bank of Scotland and Lloyds are believed to be two of the banks to sign up.

There are fears the tough measures on the banking sector could lead to an exodus of players, with groups such as HSBC and Standard Chartered signalling potential willingness to quit the UK.

But Mr Osborne said banks should share the pain of measures to repair the deficit caused by the financial crisis and added that he and his coalition colleagues "neither want to let banks off their fair contribution, neither do we want to drive them abroad".

Initial details in the summer Budget showed the levy would be charged at a lower rate of 0.04% in the first year - generating an expected £1.15 billion - rising to 0.07% or £2.3 billion in 2012/13 and up to £2.5 billion in 2013/14, and the Treasury said these details were yet to be finalised.

The developments come as experts predict UK bank bonuses will reach around £7 billion this year after the sector's marked recovery since the credit crunch.

US players such as Goldman Sachs and JP Morgan Chase have already revealed bumper pay and salary pots earmarked for staff after a better-than-expected third quarter.

TUC general secretary Brendan Barber said: "This is a pathetically small amount to demand from the banks. Ministers have come up with the smallest number that they think they can get away with, even though the banks are carrying forward £19 billion of tax losses to offset against future tax bills - losses that have been bailed out by the taxpayer."