Autumn Budget 2021: Which lenders can benefit from £4-bn city tax cut?

Highlights 

• Chancellor Rishi Sunak has announced a £4 billion City tax cut in his recent budget speech.
• The move is intended to provide support to smaller banks, so that they can compete with their larger rivals.
• Around £4 billion will be added to the cost of the UK Treasury in the next 5 years due to this move, as per OBR.

In his budget speech on Wednesday, Chancellor Rishi Sunak announced a £4 billion city tax cut. This cut to the banking surcharge in April 2023 is expected to help banks save £4 billion in taxes over a period of five years. The share of profits, which would not be subject to bank surcharge, would go up from April 2023 to £100 million from £25 million. This means that banks can avoid paying sector-specific tax on the first £100 million of their earnings, which is all set to go down that year from 8% to 3%. The surcharge may be avoided altogether by around 35 banking groups and buildings societies because of this allowance, as per the UK Treasury.

The intention of the surcharge cut is to offset the impact of the hike in corporation tax in 2023 to 25% from 19%. According to the Treasury, the move will help UK maintain its financial competitiveness. However, around £4 billion will be added to the cost of the Treasury in the coming five years to 2027, according to the estimates of the Office for Budget Responsibility (OBR).

Some of the lenders that will gain from the move include TSB, Co-operative Bank and Leeds Building Society, OakNorth, Tesco Bank, Secure Trust Bank and Shawbrook.

Let’s take a brief look at some of the lenders benefited by the move.

TSB Banking Group plc

It is a UK-based retail and commercial bank. It is a subsidiary of Sabadell Group. A network of 536 branches is operated by the company in England, Scotland, and Wales. Based on how fast the bank recovers from covid losses, TSB can benefit from the move. Prior to the covid crisis hitting the bank, it recorded a profit of around £46 million, but it recorded a loss of £205 million in 2020.

The Co-operative Bank plc

It is a Manchester-headquartered retail and commercial bank. The bank's Articles of Association has included a customer-led Ethical Policy in it, making it the only high street bank in the UK to do so. It is trying to record its first annual profit this year in over a decade. The bank may entirely circumvent the surcharge.

Leeds Building Society

Based in Leeds, England, Leeds Building Society is the fifth largest building society in the UK. It provides financial services like mortgages and general insurance. The surcharge may be completely avoided by Leeds Building Society, which recorded profits worth £80.7 million last year.

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Let’s take a look at some of the big fishes that dominate the banking sector but won’t gain much by this move.

Lloyds Banking Group PLC (LON: LLOY)

Lloyds Banking Group PLC is one of the largest financial services companies in the UK. The current market cap of the FTSE100-listed company is £34,759.46 million. It has given a return of 76.33% in 1 year. Its 5-year average dividend yield is 3.7%. The shares of Lloyds Banking Group PLC were trading at GBX 49.92 at 8:40 AM on 28 October 2021 GMT+1.

HSBC Holdings plc (LON: HSBA)

It is one of the biggest global investment bank and financial services company. It is a constituent of the FTSE 100 index and its current market cap stands at £90,836.94 million. It has given a return of 33.34% in 1 year. Its 5-year average dividend yield is 4.5%. The shares of HSBC Holdings plc were trading at GBX 440.15 at 8:43 AM on 28 October 2021 GMT+1.

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Natwest Group PLC (LON: NWG)

The company is a prominent name and offers services such as private banking, personal and business banking, and insurance. The FTSE 100 company has a current market cap of £26,574.08 million. It has given a return of 93.90% in 1 year. Its 5-year average dividend yield is 1%. The shares of Natwest Group PLC were trading at GBX 231.90 at 8:45 AM on 28 October 2021 GMT+1.