The levy, the annual tax on debts held by banks, has been raised from the current 0.078% to 0.088%, effective from 1 January 2012. This is a level the Treasury is confident will yield the originally projected £2.5bn per year.
The move follows a scrapping of a lower phase-in rate in February and an increase in the standard rate in March.
The current levy applies to all of banks’ borrowing apart from the first £20bn and ordinary deposits guaranteed by the UK government. Meanwhile, longer-term borrowing is boosted by lower tax rate.
The levy was first introduced by the coalition government to raise capital, but also to discourage banks from becoming too dependent on short-term un-guaranteed debts.
However, the current tax rate has failed to boost bank revenues, puzzling analysts.
HSBC and Standard Chartered are expected to be hit hardest, as they weathered the crisis the best.
One theory is that foreign banks may have moved some of their UK borrowings offshore to avoid the tax, although officials say this is not the case and that instead the structure of the banking market was misunderstood, as it was thought more capital would be raised from overseas banks based in London.
Another theory is that UK banks have been reducing their borrowing and lending activities in response to the stagnant UK economy and contagion risk from the eurozone debt crisis.
Furthermore, the regulatory requirement for banks to hold more capital could have led to cuts in borrowing and lending.
The tax rate hike will provoke criticism from banks, which argue British banks will be at an unfair disadvantage in comparison to their overseas rivals, because the tax rate applies to all their borrowings, not just their domestic ones.
Osborne also ruled out plans for the controversial Financial Transaction Tax (FTT) or the Tobin tax as it is known. The tax on financial trading has been suggested by EU policy makers as a method to raise cash for a range of areas from development to bailouts, but the UK has rejected the idea.
“This is not a tax on bankers, but a tax on people’s pensions,” he said today.
