The Government has confirmed in the Autumn Statement that, from 1 April 2023, the banking surcharge rate will be reduced from 8 to 3 percent. This measure is intended to mitigate the impact for banks of the increase in the UK headline corporation tax rate from 19 to 25 percent, ensuring that the sector remains internationally competitive.
It was also confirmed that the diverted profits tax (DPT) rate will increase from 25 to 31 percent at the same time, with the aim of ensuring it continues to exceed the UK headline rate and thus remains an effective deterrent against diverting profits out of the UK.
Both of these measures were first announced in the 2021 Autumn Budget. However, in September 2022’s ‘Mini Budget’ the headline corporation tax rate increase and these associated changes were cancelled. Subsequently, in a statement on 17 October, new Chancellor Jeremy Hunt announced the corporation tax increase to 25 percent would go ahead but was silent on the DPT and banking surcharge rates. This silence gave rise to uncertainty for the banking sector in particular, with widespread speculation that banks could face the prospect of a combined 33 percent corporation tax rate from April – justified as being in substance a windfall tax on profits generated by the recent economic volatility.
The announcement that the banking surcharge rate will instead fall as originally planned will provide some welcome reassurance to a sector that, like others, will now be hoping for a period of stability in the tax environment. The confirmation means that banks will broadly pay tax on their profits (above the surcharge allowance) at a rate of 28 percent from 1 April 2023, which reflects a 1 percent increase on current tax rates (19 percent headline rate plus 8 percent surcharge).
The cut in the banking surcharge to 3 percent has already been legislated for and enacted in Finance Act 2022 (following its initial announcement in last year’s Autumn Budget) meaning that there is unlikely to be any delay in this being taken into account for financial reporting purposes.
As previously announced in the 2021 Autumn Budget, there will also be an increase in the surcharge allowance available to banking groups from £25 million to £100 million from 1 April 2023. The change to the allowance will increase the amount of profit that banks can make before they start to pay the surcharge. The increased surcharge allowance will mainly benefit smaller ‘challenger’ banks.