Biggest banks to bear brunt of levy

The UK’s largest banks will bear the burden of the government’s new bank levy which aims to raise over £8bn.

Part of the government's 2011 Finance bill, the new levy comes into effect on 1 January and aims to make banks pay for the risk they pose to the economy and encourage long-term lending.

But the country's largest institutions will be disproportionately impacted by the levy which will not apply to lenders with a balance sheet of less than £20bn.

According to a consultation paper, the levy rate in 2011 will be 0.05% of a bank's balance sheet, rising to 0.075% in 2012.

The government expects the levy to raise £8.8bn between 2011-2014, with the UK's top five largest banks - HSBC, Barclays, RBS, Standard Chartered and Lloyds - expected to contribute up to half of the total.

The new tax comes amid concerns stringent taxes could make the UK banking sector less competitive and drive large institutions out of the country. Both Barclays and HSBC have recently hinted they could move overseas.

"It is clear the levy is meant as a fiscal measure for general expenditure rather than financing any sort of resolution fund," says Ash Saluja of law firm CMS Cameron McKenna. "Earlier this year the European Commission advocated ring-fenced bank levies to build a treasure chest against future banking crises. The coalition government needs to be careful the UK is not made more unattractive to bankers - whilst being out-manoeuvred by Brussels."

This week, business secretary Vince Cable said re-introducing last year's temporary 50% tax on bank employees is an option should excessive bonuses continue.