The October Budget and Spending Review, due on 27 October, is likely to see a cut in the tax surcharge levied on banks.

In his Spring Budget, Chancellor Rishi Sunak announced plans to raise corporate tax from 19 to 25 percent in 2023, to offset the pandemic’s damage to the economy.

When combined with the eight percent surcharge that has been levied on banks since 2015, this would have the effect of raising banks’ overall tax rate to 33 percent, which Sunak believes would make the City uncompetitive with other financial centres, such as New York.

Post Brexit, some business has been lost to Amsterdam, Frankfurt, Dublin, and Paris, with banks also moving nearly $1 trillion in assets out of the UK since 2016.

In July, Sunak said in his speech to the Mansion House that the combined tax burden on banks should not exceed the current 27 percent – 19 percent corporate tax, plus the eight percent surcharge. 

At the time, this suggested that the government planned to reduce the surcharge to two percent. However, a figure of three percent has been reported this week in the FT and elsewhere. 

If correct, this may be so that Sunak can present the cut as a one percent rise in banks’ tax contributions from 2023, when the higher corporate tax rate is introduced – assuming the latter remains the intention.

However, if the surcharge is cut with immediate effect, this would reduce banks’ current tax liability from 27 percent to 21 percent, at a time when workers are being asked to accept a rise in the overall tax burden, while the reduction in Universal Credit will impact the poorest people in the country.

That would be controversial, especially as the Spending Review will reveal if Sunak believes the UK can afford ambitious plans to raise R&D spending and push forward national strategies for green technologies, AI, space, and other sectors.

The FT recently reported that Sunak aims to use old economic data to offer a pessimistic forecast, so that he can claim credit for a recovery later. 

If true, then the Chancellor would be taking a colossal risk by banking on Financial Services to restore the UK’s fortunes, rather than investing in growing a broader and more diverse economy.

Earlier this year, City Minister John Glen said the government would revise the limit on bank bonuses, which was introduced by the EU in the wake of the 2008-09 financial crisis.

 “What I want is an efficient and effective Financial Services market in the context of the global market,” he told the FT, claiming that this would play a key role in the government’s ‘levelling up’ agenda – despite that agenda so far raising workers’ tax burden.