What Is a 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 £20 billion 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

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 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.