DEFINITION of 'Bank Levy'

A bank levy is a type of taxation system on UK financial institutions in which banks are forced to pay government taxes over and above any normal corporate taxes they may incur.

A bank levy also refers to a situation when a bank account is frozen due to a creditor’s legal attempt to get a debtor to repay its debt.



Bank Levy Tax in the UK

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 UK 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 UK government debts
  • ordinary deposits covered by the UK's deposit insurance scheme
  • the first £20bn of any bank's taxable debts

As of 2018, the bank levy rate is 0.16%, but this rate is set to decrease gradually over time to 0.10% in 2021. 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

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 Income, 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 she would if she 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.

  1. Levy

    A levy is the legal seizure of property to satisfy an outstanding ...
  2. Mill Levy

    The assessed property tax rate used by local governments and ...
  3. Green Levy

    Green Levy is a tax imposed by a government on sources of pollution ...
  4. Taxation

    Taxation is a term for the act of levying or imposing a tax by ...
  5. Silent Automatic Lien

    Silent automatic lien is a lien that does not appear in any public ...
  6. Bank

    A bank is a financial institution licensed as a receiver of deposits. ...
Related Articles
  1. Insights

    3 Reasons Banks Can Freeze Your Account

    Learn about the reasons why a bank account can be frozen. Discover if it is legal for creditors to freeze your account and withdraw money.
  2. Personal Finance

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
  3. Investing

    New Lows for Deutsche Bank on No Bailout Promise (DB)

    The German bank won’t get bailed out by the German government, according to an in-country report.
  4. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  5. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  6. Personal Finance

    The Evolution of Banking Over Time

    Discover how the evolution of banking has changed the business model. Find out how this system of money management developed into what we know today.
  7. Investing

    Analyzing a bank's financial statements

    In this article, you'll get an overview of how to analyze a bank's financial statements and the key areas of focus for investors who are looking to invest in bank stocks.
  1. What factors are the primary drivers of banks' share prices?

    Find out which factors are most important when determining the share price of banks and other lending institutions in the ... Read Answer >>
  2. What is the average profit margin for a company in the banking sector?

    Learn what the average profit margin is for companies in the banking sector, along with other evaluation metrics often used ... Read Answer >>
  3. Which Creditors Are Paid First in a Liquidation?

    Find out the order in which creditors are paid during a corporate liquidation. Learn how bankruptcy claims by bondholders ... Read Answer >>
  4. How do leverage ratios help to regulate how much banks lend or invest?

    Learn what leverage ratios mean for banks, how regulators restrict leverage, and what impact ratios have on a bank's ability ... Read Answer >>
Trading Center