Bank Levy

Key Takeaways

• A bank levy is a U.K. tax on banks and involves freezing accounts to recover debts.
• A creditor outside the UK that obtains a court judgment against a debtor may be able to have the court issue a bank levy.
• Originating after the 2008 financial crisis, the levy aims to mitigate financial risks.
• The levy helps fund potential future bailouts without taxpayer burden.
• Certain accounts, like Social Security, are typically not subject to a bank levy.

What Is a Bank Levy?

A bank levy is a dual-purpose financial concept involving a tax levied on banks and a legal tool where a creditor can freeze the bank account of a debtor to recover a debt. The financial crisis of 2008 prompted the UK to implement bank levies that target risky financial behavior, aiming to prevent future crises.

We'll explain how a bank levy impacts financial institutions through additional taxation and how it serves as a debt recovery tool in the United States and other regions.

How Bank Levies Work and Their Impact

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 the banks’ risky borrowing activities that contributed to 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 for short-term chargeable liabilities 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 for short-term chargeable liabilities is 0.14%. Long-term chargeable equity and liabilities are taxed at half these rates as they are deemed to be inherently less risky—0.07% in 2020 and dropping to 0.05% in 2021.

The Role of Creditors in Bank Levies

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 them 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.

Personal Finance

Banking