The UK government’s £800 million (around $1.287 billion) hike in its bank levy was criticised by the financial services sector yesterday, including the wealth management industry, as likely to cause sudden increases in charges that will hit end-consumers.

Yesterday, George Osborne, the UK finance minister, said he was raising the bank levy immediately ahead of the annual budget statement that is usually issued in late March/early April. When the tax was introduced last year following the May national elections, it was rolled out with an initial levy target of £1.7 billion, but eventually expected to raise £2.5 billion.

Critics of such levies say that tax hikes will be inevitably passed on to consumers in the form of less attractive savings rates, higher borrowing costs and deteriorating standards of service. The government has defended the levy as among a number of measures to close a massive public deficit. The measure is also seen as a way of cooling public anger over public bailouts for banks following the credit crisis of 2008.   

“This kind of abrupt levy made on such an arbitrary basis will potentially bump up charges across the wealth management industry. It is inevitable that any business served such an impromptu bill will have to recover its costs somehow. I doubt this will take an explicit levy-on-a-levy format, so it will increasingly need to be factored in to pricing structures and balance sheets as a regular, ordinary expenditure that will unfortunately become part and parcel of life as a wealth management firm,” said Paul Killik, senior partner at Killik & Co.

Professor Philip Booth, editorial and programme director at the Institute of Economic Affairs, said: “Increasing and extending this levy at this time is clearly a political decision – but it is bad economics. Financial services are something this country has successfully specialised in – it is something we are good at – and further seeking to penalise it for political gain is dangerous.”

“The government has set up the Independent Commission on Banking for the purpose of creating mechanisms whereby banks can fail in an orderly fashion, without bringing the whole system down and requiring taxpayer bailout. Yet this increased levy is supposedly being imposed in order to contribute towards a potential future bailout – the very thing these mechanisms will guard against. The government's policy on this is completely incoherent,” Prof Booth said.

The British Bankers’ Association, meanwhile, took a slightly less negative line on the levy.

“The levy is nothing new and the only difference is that the government is bringing it in now, rather than phasing in the full amount. However the levy itself is complex and will hit our most global banks hardest as they operate and pay tax across national boundaries. Changing the tax goalposts also makes things harder - all organisations want a predictable tax regime so they can plan their businesses accordingly and constant chopping and changing risks making the UK a less attractive place for businesses to operate,” it said.