Financial Services Sector Makes its Highest Recorded Tax Contribution
New figures published by City of London Corporation show that the total tax contribution for the financial services sector reached £71.4 billion in the year to 31st March 2016. This was a 7.4% increase on the previous year’s figures and the highest in the nine years that the report has been produced.
The contribution, which is the last set of financial services tax data to be published before Brexit negotiations commence, is 11.5% of total UK government tax receipts. It also shows that for every £1 of corporation tax paid – one of the largest direct taxes – there is another £3.83 paid in other direct taxes.
The report, which was produced by PwC, shows banks and insurance firms were the highest overall tax-paying sub-sectors, due to reforms in corporation tax and the bank levy. The analysis shows financial firms paid £8.4 billion in corporation tax, up from £7.6 billion (10.5%) on the year before, whilst the bank levy saw foreign and UK based banks contribute £3.4 billion in the last financial year – an increase of more than 25%.
Data from the report shows that the equivalent of almost a quarter (23.3%) of financial services’ turnover in the last financial year went straight to the public coffers.
For the first time since the data has been collected, the analysis compares the sector’s highest tax contributors – banks and insurers. Other than highlighting sector-specific levies and tax measures, the comparison shows that employment taxes make up over half of the contribution from banks but are less significant for insurers, where they make up less than a third of the contribution.
Overall, employment generates the largest amounts of tax paid into the public finances, accounting for 47.8% of total receipts. Financial services employs 1.1million people across the UK (3.4% of the workforce), while the study found average employment taxes per employee were over £32,000. Reforms on pension drawdowns, which came into force in April this year, are also represented in employees’ tax totals but is expected to level out in next year’s data.
Mark Boleat, Policy Chairman at the City of London Corporation said: “As the last set of data on financial services’ tax contribution before the Brexit negotiations begin, it is hugely important.
“In light of the UK’s decision to leave the EU, these new findings not only demonstrate the significant contribution made to Government revenues, but are also key in helping us to understand the potential impact of Brexit on different sub-sectors within financial services.
“As one of the UK’s biggest service exporters, it’s understandable the sector also contributes a considerable amount of tax. Despite this, the sector arguably stands most to lose as negotiations loom. It makes it clear the argument that Government should be engaging with firms as it approaches talks with the remaining EU 27, and the pulling of the political trigger.”
Andrew Kail, Head of Financial Services at PwC, said: “The City of London Corporation report shows the continued importance of the financial services sector to the UK Exchequer and the wider economy.
“Specifically, the report highlights an increasing reliance on tax receipts from banking and insurance firms. This is balanced against a backdrop of downward pressure affecting return on equity for the banks in particular, resulting from regulatory changes and the low interest rate environment.
“With the added potential adverse impacts of Brexit on the sector, the question arises as to whether the current levels of tax contribution are sustainable.”
Indirect taxes – which companies collect on behalf of others, such as income tax collected under PAYE, employee tax and national insurance contributions – are 1.27 times the size of direct taxes, such as corporation tax and the bank levy. For every £1 of corporation tax paid by financial services companies there is another £6.01 in taxes collected. Employees’ income tax and NIC deducted under PAYE are the largest taxes collected, and together represent on average 65.4% of the total taxes collected.
(Source: City of London Corporation)