What Is a Bank Levy?

A bank levy is a type of taxation system on financial institutions of the United Kingdom in which banks are forced to pay government taxes over and above any normal corporate taxes that they may incur due to the risks they pose to the larger economy. A bank levy also refers to a situation in which a bank account is frozen due to a creditor’s legal attempt to get a debtor to repay its debt.

Key Takeaways

  • The bank levy in the U.K. is a tax charged to the balance sheet of banks above and beyond the corporate taxes that they pay.
  • The financial crisis of 2008 was the impetus to enforce a bank levy due to the risks banks pose to the financial system.
  • A bank levy is also when a creditor freezes the bank account of a debtor in an attempt to collect on an outstanding debt.

Understanding a Bank Levy

Bank levies came into prominence following the 2008 global financial crisis when many of the world's financial institutions were bailed out by their national governments to avoid an even more disastrous outcome than what had already occurred. Subsequently, many economic leaders and pundits called for a tax on banks to prevent excessive employee bonuses, especially considering that many of the financial institutions would have ceased to exist had it not been for publicly funded government bailouts.

A bank levy is a tax on all U.K. banks’ balance sheets, mostly their debts. Each year, the value of all funds deposited in the banks is assessed and taxed. This is done in order to maintain financial discipline and prevent outlandish spending, bonuses, or possible overly risky behavior. The levy is imposed to control banks’ risky borrowing activities which have been blamed for the credit crisis. The proceeds from the tax are set aside by the government to create an insurance fund to bail out the industry in the event of a future crisis so as not to make taxpayers pay for bailouts.

The levy is calculated on total aggregated liabilities and equity excluding:

  • borrowing backed by U.K. government debts
  • ordinary deposits covered by the U.K.'s deposit insurance scheme
  • the first £20 billion of any bank's taxable debts

The bank levy rate is an annually decreasing rate and is set to decrease gradually over time to 0.10% in 2021. For the 2020 tax year, the bank levy is 0.14%. Liabilities that are due to mature over one year are taxed at only half these rates as they are deemed to be inherently less risky.

Bank Levy by Creditors

Outside of the UK, a creditor that obtains a court judgment against a debtor may be able to have the court issue a bank levy. The bank levy allows a bank to freeze the account(s) of a debtor until all the sought-after debt is repaid in full. If the levy is not lifted, the creditor can take the funds from the bank account and apply it to the total debt owed.

A bank levy is not a one-time event. A creditor can request a bank levy as many times as needed until the debt has been satisfied. In addition, most banks charge a fee to their customers for processing a levy on their account.

A bank levy can occur due to either unpaid taxes or unpaid debt. Some types of accounts, such as Social Security benefits, Supplemental Security Income, Veteran’s Benefits, and child support payments, generally cannot be levied. A debtor who owes money to the federal government would not have as much protection as they would if they owed a private creditor.

The Internal Revenue Service (IRS) and the Department of Education (DoED) usually use the bank levy the most, but other creditors can use this method as well. Private creditors typically need a legal court order to proceed with a bank levy but the IRS typically does not. Usually, the debtor is not given a warning by their bank or by the creditor that their account will be frozen. At this stage, the creditor will have made numerous attempts already to collect the debt, so the debtor should be aware of the type of situation they are in.

In most cases, a debtor is allowed to dispute the levy, which may prevent the levy or reduce the amount the creditor is able to access. Reducing the amount so that the creditor does not have access to all the funds in an account is an important aspect for a debtor, as they could possibly lose any cash needed to pay for essential items such as food and rent.