The total tax contribution of UK financial services in 2020 - 13th Edition
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In association with: The total tax contribution of UK financial services in 2020 13th Edition
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The total tax contribution of UK financial services in 2020 1
Foreword
The financial services sector
adapted to whole-scale remote
working almost overnight,
made possible by a skilled
and adaptive workforce and
investment in technology.”
Catherine McGuinness
Policy Chair of the City
of London Corporation
Undoubtedly, 2020 was a year However, the future is uncertain, and We hope this data will better inform
without precedent. The pandemic we do not yet know the long-term the public narrative and encourage
cast a long shadow over people’s impacts of the pandemic, Brexit and constructive debate about the value
lives and, although a vaccine is changes in ways of working. of the financial services sector to the
now available, it will take time for UK economy.
This report is the thirteenth annual
business to recover.
study of the total tax contribution of We thank the participating companies
At the same time, we have seen the financial services sector. The data for continuing to support the survey
strong agility and resilience. The from the 2020 survey largely predates in record numbers. Their support
financial services sector adapted to the pandemic, but it illustrates the allows us to publish data that would
whole-scale remote working almost scale and stability of the sector’s not otherwise be available in the
overnight, made possible by a contribution to public finances. public domain.
skilled and adaptive workforce and
This year, the study goes further,
investment in technology.
to predict how the contribution may
These factors allowed the financial change in pandemic times. The rich
services sector to provide support data we have collected through
to businesses in London and across these studies over time allows us
the UK – for example, by rolling to project the expected reduction
out huge amounts of government- in tax receipts.
backed loans.
Contents
1 Foreword
4 Executive summary
10 Chapter 1 – The economic impact of the pandemic on the financial services sector
11 Impact of COVID-19 on the economy
12 Resilience of the financial services sector
17 Looking forward
17 Summary
18 Chapter 2 – Potential evolution of the financial services sector’s tax contribution in 2021
19 Relationship between GVA and TTC
20 Looking forward: GVA and TTC projections
21 Summary
22 Chapter 3 – Total tax contribution of the financial services sector in 2020
23 Key components of the total tax contribution
27 The significance of employment in the financial services sector
29 Resilience as a result of a changing profile of taxes
30 Tax payments as a share of profit and turnover
31 Looking forward
32 Appendix
33 Appendix 1 – 2021 TTC projection methodology
34 Appendix 2 – 2020 TTC survey results and methodology
36 Appendix 3 – Glossary of taxes
The total tax contribution of UK financial services in 2020 3
List of figures
Figure 1 11 Figure 10 23
Economic growth, Q1 2019 to Q3 2020 Total tax contribution of UK financial services sector in
the year to 31 March 2020
Figure 2 12
Figure 11 24
Consumer credit
Key components of financial services’ total tax
Figure 3 13
contribution in 2020
Mortgage approvals
Figure 12 25
Figure 4 14
Taxes borne by financial services companies in 2020
a. Annual growth of lending to businesses
Figure 13 26
b. Headline flows for lending to four key sectors
Taxes collected by financial services companies in 2020
Figure 5 15
Figure 14 29
Average weekly hours worked by sector, 2019-20
The changing profile of taxes from 2007 to 2020
Figure 6 16
Figure 15 30
Proportion of workers furloughed as of 31 July 2020
Trend in total tax rate
Figure 7 17
Figure 16 34
Financial services sector gross value added
Survey participation by sector
Figure 8 19
Figure 17 35
Financial services sector TTC as a proportion of GVA
Taxes borne and collected by survey participants in the
Figure 9 21
year ending 31 March 2020
a. Financial services sector GVA in 2020 (actual) and 2021
Figure 18 36
(projected)
b. Financial services sector TTC in 2020 (actual) and 2021 Colour code used to identify taxes paid by financial
(projected) services companies
Executive summary The total tax contribution (TTC) The study provides a unique insight report, now in its thirteenth into how the total tax contribution year, shows the financial services of the financial services sector might sector’s importance in terms of tax be affected by the pandemic in the contribution, as well as its resilience year to 31 March 2021, although the during a global pandemic. impact of Brexit remains unknown. Beyond the tax contribution, the sector has also supported the wider economy since March 2020 in a variety of ways.
The total tax contribution of UK financial services in 2020 5
The financial services sector makes an
important contribution to public finances
Financial services firms make a
large contribution in taxes to the
public finances.
£75.6bn £75.5bn
2020 2019
In the financial year to 31 March
2020, we estimate that the total
tax contribution from the sector
was £75.6bn, similar to 2019’s
contribution of £75.5bn.
This amounts to more than The total comprises
10%
of total government
receipts from all taxes.
£34.1bn £41.5bn
in taxes borne in taxes collected
directly by financial from their customers
services firms. and employees.
The contribution made
by the sector is particularly
striking given that the
coronavirus outbreak
£100 £26.50 has caused a recession of
unprecedented magnitude.
paid in taxes While the pace and path
turnover
For every £100 in turnover, of recovery from the
financial services firms pay the virus is clouded in
equivalent of £26.50 in taxes. uncertainty, the financial
services sector provides
an element of stability.
The financial services sector has
shown resilience through the crisis,
allowing it to support the economy
The sector’s resilience has enabled Over the past decade, the sector has
it to support individuals and other invested significantly in new technology,
industry sectors during the pandemic. which has allowed it to transition to remote
Economic activity in financial services has working. As a result, financial services firms
remained relatively stable and contracted have been able to carry out most of their
much less than the wider economy. core activities during the pandemic,
which meant just
4%
of the sector’s employees
were furloughed using the
Coronavirus Job Retention
Scheme. Only two sectors
(public administration
and defence; and energy)
furloughed fewer of their
employees than the financial
services sector.
This resilience and infrastructure allowed
financial services firms to support
businesses and individuals throughout
the pandemic.
In Q2 2020, gross value added – a measure
of economic activity that can be used to Almost
indicate the contribution of a sector to the
economy – decreased by
1in2
-5% -20%
trading businesses have received some
form of financial assistance from the
financial services economy-wide sector since the crisis began.
Nearly
2m
mortgage payment deferrals
GVA Q2 2020 were granted – equivalent to
one in six mortgages in the UK.
Over
This comparatively strong performance
is in large part due to the regulatory
reforms and actions taken by the sector
£1.7bn
payout expected by the
to build up its stability following the
insurance industry in claims
financial crisis of 2008.
related to the pandemic.
The total tax contribution of UK financial services in 2020 7
The predicted total tax contribution will
not drop below 2015 levels, even in the
worst case scenario
The reintroduction of a national lockdown
in November 2020 and January 2021 is JAN-MAR
expected to delay the economy’s recovery, 2021
although their impact is likely to be less
severe than the first lockdown. For the
financial services sector, gross added value NOV-DEC
is expected to stall. 2020
GVA
MAR-MAY
2020
Using TTC surveys carried out over the past
Total tax
decade, we find that changes in the gross
value added of the financial services sector
contribution have resulted in a broadly similar change in
total tax contribution.
of the financial Based on the latest gross value added data
services sector
and our predictions, we estimate that the
total tax contribution of the financial
services sector in the year ended
31 March 2021 will be between
£71.1bn
and
£75.7bn
In other words, even our most
pessimistic projections suggest that the
total tax contribution in 2020/21 will not
fall below its 2015 value.
Over the past decade, the financial services
sector’s total tax contribution has become
less dependent on corporation tax and
2015
2016
2017
2018
2019
2020
2021
more dependent on taxes not linked to
profit, such as employment taxes. In a
pandemic, when profits fall, other taxes
fall less and the total tax contribution is
more stable.
Employment taxes are the largest element of the
total tax contribution, but new ways of working,
accelerated by the pandemic, may change this
Employment taxes Advances in technology are leading to new
make up roles in financial services. Jobs will be
created in emerging technologies, fintech
45% and cyber security, although some may
be lost as a result of automation.
of the total tax contribution
because of the many skilled
jobs the sector provides – or
£34.5bn
in employment taxes.
This means the sector, Technological changes are also leading to
with its new ways of working, a trend accelerated
1.1m
by the COVID-19 lockdowns, which
necessitated remote working and virtual
interaction with customers.
workers
3.2% of the
UK workforce
makes a contribution
amounting to
11.1%
of total employment
taxes in the UK.
However, changing working
practices will affect this
contribution in future.The total tax contribution of UK financial services in 2020 9
Looking forward
With increasing credit risk, role to play in supporting businesses
decreasing interest rates and and communities as the economy
a reduced demand for insurance recovers from the pandemic.
in some areas, the financial services
The way forward is uncertain,
sector faces challenges in the
however, particularly with the
months and years ahead.
introduction of a third national
Technological advances and new lockdown and the transition to new
ways of working mean the sector trading arrangements between the
must accelerate the change to UK and the EU following Brexit. If the
digitisation and develop new economic recovery is weaker than
products. From providing emergency expected, the financial services sector
loans to managing increased will suffer too.
insurance claims, the sector has a
City of LondonChapter 1
The economic impact of the
pandemic on the financial
services sector
Over the past 12 years, this report sector paid £34.5bn in employment
has highlighted the contribution taxes – or 11.1% of government tax
made by the financial services (FS) receipts from employment.
sector in taxes to the public finances
In this thirteenth edition of the
and the creation of skilled jobs.
report, we have included additional
Chapter 3 shows that, in the year research and analysis to highlight
to 31 March 2020, the FS sector the sector’s role in the wider
contributed £75.6bn in taxes, economy. Its infrastructure and
which is 10.1% of total government resilience have enabled it to support
receipts from all taxes. businesses by administering large
numbers of government loans.
In the same period, employment
taxes made an even more
significant contribution. We
estimate that the financial servicesThe total tax contribution of UK financial services in 2020 11
Impact of COVID-19 on the economy
On 23 March 2020, UK Prime Minister As the government began to reduce
In Q2 2020, the output of the Boris Johnson announced that the social distancing restrictions from
financial services sector fell by UK would respond to the coronavirus June onwards, the economy started
4.6%
outbreak by introducing a national to recover. In the third quarter of
lockdown. Non-essential retail was 2020, UK GDP grew by a record
closed, and workers were encouraged 15.5%. This growth was largely driven
compared with an economy-wide to work from home and avoid social by growth in the hospitality and
fall in GDP over the same period of contact where possible. accommodation sectors, which were
19.8%
boosted by the government’s Eat
The impact of these measures
Out to Help Out scheme, as well
on the economy was immediate,
as by the increased popularity of
with activity in the hospitality and
domestic ‘staycations’.
accommodation sectors almost
entirely stopping, whilst Over the same period, FS sector
construction and manufacturing output grew by a comparatively
output fell markedly. smaller 2.2%, though this is largely
because the contraction of the FS
As shown in Figure 1, the overall
sector in the second quarter of 2020
effect of the virus on the UK economy
was far less than that of the whole
was to reduce gross domestic
economy. Despite the economy
product (GDP) in the second quarter
making significant progress since its
of 2020 by 19.8%. The impact of the
initial steep contraction in the second
virus on the FS sector was noticeably
quarter of 2020, both economy-wide
less pronounced, with output in the
and FS sector output still remained
sector reducing by 4.6% over the
below pre-pandemic levels in the
same period.
third quarter of 2020.
The next section further investigates
the resilience of this sector to the
economic impacts of COVID-19.
Figure 1: Economic growth, Q1 2019 to Q3 2020 (Q4 2019 = 100)
105
100
95
90
85
80
75
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2019 2020
Financial services Whole economy
Source: Office for National Statistics (ONS).Resilience of the financial services sector
To investigate the resilience of the FS Within financial services, the banking
In May 2020, credit card sector, we use a statistic called gross subsector accounts for most of the
borrowing was value added (GVA), a measure of fall in GVA, with its GVA down from
11%
economic activity that can be used to £17.7bn in Q1 2020 to £16.6bn in Q2.
indicate the contribution of a sector The closure of bank branches at the
to the economy.1 This statistic is start of lockdown and the lacklustre
lower than in May 2019. useful as it enables us to evaluate the performance of the wider economy
performance of the FS sector largely accounted for this fall.
over time, with increases in GVA
However, the negative impact
showing that the sector is growing
was not uniformly spread across
in size, and decreases indicating that
banking: households responded to
the sector is shrinking.
the virus by borrowing less, while
The impact of the virus on the FS businesses, which had liabilities to
sector was less severe than on other meet in the face of reduced trading,
sectors, with its GVA falling from borrowed more.
£31.2bn in Q1 2020 to £29.8bn in
The decline in household borrowing
Q2 – a fall of 4.6% compared with
was largely driven by falls in
an economy-wide fall of 19.8%
consumer spending as non-essential
over the same period. The sector’s
businesses closed, and by consumers’
resilience is in large part the result
increasing caution in a period of
of actions taken by the sector since
uncertainty. In May 2020, credit
the financial crisis of 2007-08. These
card borrowing was 11% lower than
actions have led the Financial Policy
at the same time in the previous year,
Committee of the Bank of England to
while total borrowing was down 3%
express its confidence in the sector
(see Figure 2).
to “withstand severe market and
economic disruption”.2
Figure 2: Consumer credit (year-on-year growth rate; seasonally adjusted)
10%
5%
0%
-5%
-10%
-15%
Mar Jun Sep Dec Mar Jun Sep
2019 2020
Credit cards Other loans and advances Total
Sources: ONS, Bank of England.
1 GVA is equal to the total value of the goods and
services that have been produced in the sector, less the
cost of the inputs and raw materials that are directly
attributable to the production of those goods and
services.
2 www.bankofengland.co.uk/financial-policy-summary-
and-record/2020/march-2020The total tax contribution of UK financial services in 2020 13
A key external factor contributing
to the fall of GVA in the banking
subsector was the freezing of the
property market during the initial
months of the lockdown, which
had a dramatic effect on mortgage
lending (see Figure 3). In April 2020, Key statistics: financial
mortgage approvals totalled 56,600
– almost half the number in March
support offered by the
(111,000). However, once restrictions banking subsector
on the property market were lifted,
the market rebounded strongly,
with monthly mortgage approvals
reaching 136,000 by September 2020.
27m
interest-free overdrafts
Figure 3: Mortgage approvals (thousands; seasonally adjusted)
100
90
1.9m
80 mortgage payment deferrals,
70
equivalent to
1in6
60
50
40
30 mortgages in the UK
992,400
20
10
0
Sep
2017
Dec Mar
2018
Jun Sep Dec Mar
2019
Jun Sep Dec Mar
2020
Jun Sep
payment deferrals
on credit cards
House purchase Remortgaging
Source: Bank of England.
686,500
payment deferrals
on personal loans
Source: UK Finance.While households were able to businesses was also up on the previous Figure 4b shows that this increase
reduce their spending during the year, though by a comparatively in borrowing helped to support four
first national lockdown, businesses smaller increase of 4%. This is because key sectors (construction, real estate,
had to rely on borrowing to honour large businesses have access to a transport and manufacturing) at the
obligations on their leases and wider source of funding than small height of the pandemic. The real
towards their staff. Figure 4a shows and medium-sized businesses, which estate and manufacturing sectors
that lending to small and medium- rely more on borrowing from banks. experienced the largest increases in
sized businesses in July 2020 was 21% Large businesses can, for example, net lending in March compared with
higher than at the same time in the use intercompany loans to shift February, with net lending to these
previous year, while total lending was funds to business units experiencing sectors increasing by £7.7bn and
10% higher. Lending to large cash shortfalls. £7.0bn, respectively.
This increase in borrowing was only
possible due to the rapid response of
Figure 4a: Annual growth of lending to businesses (%)
the banking subsector to the national
lockdown, with most high-street
25%
banks offering government-backed
loans to businesses affected by the
20% pandemic. These schemes have
provided companies with more than
£60bn of funding since mid-March.3
15%
The financial assistance provided
by the FS sector has been, and
10%
will continue to be, essential to
the economy’s recovery from the
5% virus. Without these loans, many
businesses adversely affected by
0%
the virus would have been forced to
Mar Jun Sep Dec Mar Jun Sep close. According to an ONS survey,
2019 2020
almost half of businesses (that have
Total lending Loans to SMEs Loans to Large companies not permanently stopped trading)
have received some form of financial
Source: Bank of England.
assistance from the sector since the
crisis began.4
Figure 4b: Headline flows for lending to four key sectors (£bn; monthly changes)
£bn
25
20
15
10
5
0
-5
-10 Mar Jun Sep Dec Mar Jun Sep
2019 2020
Construction Real estate Transport, storage and communication Manufacturing
Source: Bank of England.The total tax contribution of UK financial services in 2020 15
39%
of employees in the FS sector said The FS sector as a whole has coped
they had worked from home in the well with the worst effects of the
past, compared with an economy- pandemic. In part, this is because
wide average of 28%.5 the sector has been able to carry out
most of its core activities throughout
the crisis. While the average weekly
hours worked for the whole economy
fell dramatically in the first quarter
of 2020, the fall in hours worked in
the FS sector was significantly lower
(Figure 5). In part, this is due to the
sector’s investment in recent years
in technologies that enable remote
working. In a survey conducted by
the ONS prior to the pandemic, 39%
of financial services staff said they
had worked from home in the past,
compared with an economy-wide
average of 28%.5
Figure 5: Average weekly hours worked by sector, 2019-20
hrs
35
34
33
32
31
30
29
28
27
26
25
Jan-Mar Mar-May May-Jul Jul-Sep Sep-Nov Nov-Jan Jan-Mar Mar-May May-Jul
2019 2019 2019 2019 2019 2020 2020 2020 2020
Financial services Whole economy
Source: ONS.
3 These loan schemes include: Coronavirus Business
Interruption Loan Scheme (CBILS), Coronavirus Large
Business Interruption Loan Scheme (CLBILS) and the
Bounce Back Loan Scheme (BBLS).
4 www.ons.gov.uk/economy/
economicoutputandproductivity/output/datasets/
businessimpactofcovid19surveybicsresults
5 www.ons.gov.uk/employmentandlabourmarket/
peopleinwork/employmentandemployeetypes/articles/
technologyintensityandhomeworkingintheuk/2020-05-01The FS sector has been able to The worst affected sectors
continue operating at almost furloughed more than 40% of their
normal levels during the crisis, so staff, drawing on the Coronavirus Job
it has required less government Retention Scheme (CJRS). The scheme
support than most sectors. As of July provides grants to private sector
2020, only 4% of financial services employers to pay 80% of the wages
employees were furloughed, which of employees who would otherwise
meant 96% of staff were working have lost their jobs (up to a maximum
as normal throughout this period. of £2,500 per person per month).
Only two sectors (energy; and public
sector administration and defence)
furloughed fewer of their employees
than financial services firms
(see Figure 6).
Figure 6: Proportion of workers furloughed on the CJRS as of 31 July 2020
Arts, entertainment & recreation 45%
Accommodation & food services 43%
Construction 22%
Administrative & support services 19%
Real estate 18%
Professional, scientific & technical 17%
Wholesale & retail 17%
Manufacturing 17%
Transportation & storage 16%
Information & communication 12%
Mining & quarrying 11%
Water supply, sewerage & waste 10%
Agriculture, forestry & fishing 8%
Health & social work 6%
Education 6%
Finance & insurance 4%
Energy production & supply 4%
Public administration & defence 1%
Source: ONS.The total tax contribution of UK financial services in 2020 17
Looking forward
England returned to a national to see a reduction in mortgage 1 January 2021 – these rights had
lockdown for four weeks in approvals of the same magnitude enabled UK-based firms to sell their
November 2020, and then once as the first lockdown. services in the EU without having
again in January 2021, with national to go through time-consuming and
The transition to new trading
restrictions likely to last until at least expensive application processes.
arrangements between the UK and
mid-February. The reintroduction Until an EU-wide arrangement for the
the EU will put further downward
of national restrictions is expected sector is agreed, UK firms will have
pressure on the recovery of the FS
to put a significant dent in the to comply with the requirements of
sector. Financial services firms lost
economy’s recovery, as well as the individual member states.
their passporting rights from
recovery of financial services. While
the sector grew by 2.2% in the third
quarter of 2020, Figure 7 shows that Figure 7: Financial services sector gross value added (constant prices; £bn)
its growth is expected to stall from
the fourth quarter of 2020 onwards £bn
as a result of the national lockdown.6
32.0
Despite this, it is expected that the
impact of the second and third 31.5
national lockdowns will be less severe
than the first. This is largely due
31.0
to the investment that businesses
Projections
have made since the first national
30.5
lockdown to enable remote working,
as well as procedures put in place
by some industries to remain open 30.0
while enforcing social distancing.
29.5
In contrast to the first lockdown, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
the property market is expected 2019 2020 2021
to remain open throughout this
Source: ONS, PwC analysis.
period, so we would not expect
6 These projections are taken from the ‘slow recovery’ scenario in the January edition of PwC’s UK Economic Outlook.
We have used estimates from this scenario, rather than from PwC’s more optimistic ‘quick recovery’ scenario, as we
believe the risks are weighted to the downside in Q1 2021 (as a result of the third national lockdown).
Summary The financial services sector plays
an essential role in the economy.
an even bigger role in the economy,
with many businesses becoming
It provides credit to households increasingly reliant on the loans
and firms, fuelling economic growth it administers.
throughout the economy, whilst
However, the way forward is
contributing significant tax payments
uncertain. If the economy’s recovery
(as shown in Chapters 2 and 3) that
is weaker than expected, the financial
can be used to fund public services.
services sector will suffer too.
The sector has so far proved resilient
to the worst economic impacts of
the virus. This has enabled it to playChapter 2
Potential evolution of the
financial services sector’s tax
contribution in 2021
This study provides a unique insight To produce this estimate, the study services companies in the year to
into the total tax contribution (TTC) follows the widely used approach of 31 March 2021 will be between
of the financial services sector estimating the tax buoyancy of the £71.1bn and £75.7bn. This suggests
over the next year, in light of the sector. Here, tax buoyancy means that the TTC of the sector is
economic impact of the COVID-19 the degree to which the total tax expected to fall slightly from the
pandemic. contribution of the financial services previous year, which is estimated at
sector responds to changes in the £75.6bn (as outlined in Chapter 3).
We use the gross value added
sector’s GVA, with GVA being used
(GVA) projections (outlined in the However, even our most pessimistic
as a proxy for the sector’s tax base.7
previous chapter) to estimate the projection (the lower end of this
The estimated tax buoyancy is then
contribution that financial services range, £71.1bn) suggests that the
applied to our GVA projections for
companies are projected to make to TTC of the sector will not fall below
financial services over the next year
the UK public finances through their its 2015 value. This demonstrates
in order to project the sector’s likely
taxes in the year to 31 March 2021. the resilience of the sector, with
TTC over the same period.
This estimate includes corporation both its GVA and TTC expected to
tax, employment taxes, VAT and Using this approach, this study remain at high levels despite the
stamp duty, among others. estimates that the TTC of financial coronavirus pandemic.The total tax contribution of UK financial services in 2020 19
Relationship between GVA and TTC
To estimate the total tax contribution This trend likely reflects increases in
of the financial services sector the tax buoyancy of the sector over
in 2021, we use the relationship time, whereby annual increases in
between the total tax contribution GVA result in even larger increases
of the sector and its GVA. Whilst the in TTC. We expect this increase in the
former is a measure of a sector’s tax buoyancy of the sector is in large
contribution to the public finances, part due to changes in the profile of
the latter is a measure of the level of the tax system over the past decade.
economic activity within a sector, and Over time, successive governments
its contribution to the economy as a have introduced new taxes on the
whole. GVA can be used as a proxy sector and increased the rate of taxes
for the sector’s tax base as it provides already levied on the sector
an indication of the sector’s level of (as outlined in Chapter 3).
economic activity (as discussed in
Chapter 1). Figure 8: Financial services sector TTC as a proportion of GVA (%)
In Figure 8, we use data from our
long-established study (combined 70%
with GVA data from the ONS) to show
that the TTC of the financial services 60%
sector as a proportion of its GVA has
50%
risen over the past decade. This is
because, while both TTC and GVA 40%
have risen in nominal terms over
the past decade,8 TTC has increased 30%
at a faster rate. The TTC of the FS
20%
sector has increased from £53bn in
2010 to £76bn in 2020, whilst the 10%
GVA of the sector has increased 46% 54% 53% 54% 54% 53% 61% 56% 59% 59% 60%
from £117bn to £127bn over the 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
same period. In turn, the TTC as a
proportion of GVA has increased Source: ONS, City of London.
from 46% in 2010 to 60% in 2020.
To estimate the relationship between decrease in the gross value added
TTC and GVA, we use econometrics of the FS sector will increase/
– an analytical technique that uses decrease its total tax contribution
economic theory, mathematics and by 0.96%. This finding is in line
7 More precisely, for the purposes of this study, tax statistical methods to quantify the with the results of similar studies,
buoyance is defined as equivalent to the percentage relationship between two or more which generally find a one-to-one
change in the total tax contribution of the financial
services sector resulting from a one percentage change variables (such as tax and GVA).9 relationship between output and
in the sector’s gross value added.
This approach has been widely used taxes (in our case, GVA and TTC)
8 Inflation will account for some of this increase in the by other studies to project the tax over the long term.
gross value added and total tax contribution of the
financial services sector. Despite this, it is still possible contributions of different sectors,
to make meaningful comparisons between the two
indicators in each year of the sample period.
regions and countries.10
9 For a detailed explanation of this methodology, please Using this approach, we estimate a
refer to appendix 1.
tax buoyancy for the sector of 0.96,
10 For an overview of similar studies, see the IMF’s 2020
article, Challenges in Forecasting Tax Revenue. which implies that a 1% increase/Looking forward: GVA and TTC projections
Having estimated the relationship We would consider the lower end of
between GVA and TTC, it is possible this range to be more plausible, as
to use our forecasts of the sector’s previous research has indicated that
GVA over the next year to project the tax buoyancies are generally higher
TTC over the same period. Figure 9a during recessions, in some cases
presents our projections for the GVA even doubling. If the tax buoyancy
of the FS sector – mainly that the GVA of the FS sector during the COVID-19
of the FS sector will fall to £121.5bn pandemic is greater than one (our
in the year to 31 March 2021, down central estimate is 0.96), then the
from £125.4bn in the previous year. projected fall in GVA will result in
an even larger reduction in the TTC
As outlined in the previous chapter,
of the sector. It should be noted,
this expected fall is largely due to
however, that even the lower end of
the COVID-19 pandemic, which has
this range (£71.1bn) would equate to
had a negative impact on the whole
a fall in TTC that is relatively muted
economy. As a result of the fall in
compared with the expected falls in
financial services GVA, we expect the
the tax contribution of other sectors.
TTC of the sector to drop to £73.4bn
This is largely due to the resilience
in the year to 31 March 2021, down
of the financial services sector to
from £75.6bn in the previous year
the worst economic effects of the
(as shown in Figure 9b).
pandemic, as shown in Chapter 1.
The COVID-19 pandemic is an almost
unprecedented event that makes it
more challenging to project economic
indicators such as GVA and TTC.
To account for this uncertainty, in
Figure 9 we have constructed a 90%
predictive interval for the projected
TTC of the FS sector. This interval
suggests that, if the GVA of the
sector falls to £121.5bn in 2021 (as
projected by our analysis), then on
90 occasions out of 100, the sector’s
total tax contribution will be between
£71.1bn and £75.7bn.The total tax contribution of UK financial services in 2020 21
Figure 9a: FS sector GVA in 2020 (actual) and 2021 (projected) Figure 9b: FS sector TTC in 2020 (actual) and 2021 (projected)
£bn £bn
130 80
125 £125.4bn £75.6bn
75
£121.5bn £73.4bn
120
70
115
110 65
2020 2021 2020 2021
Projected GVA Projected TTC range
Sources: ONS, City of London, PwC analysis.
The projected falls in GVA in 2020 As outlined in the previous chapter,
result in similar reductions in this is in part the result of actions
TTC. However, even in our most taken by the sector and regulators
pessimistic scenario (the lower end to build up resilience following
of the TTC projections), the TTC of the the financial crisis of 2007-08.
FS sector is not expected to fall below Investment in remote working has
its 2015 value. Its GVA and TTC are also enabled the sector to function
expected to remain high despite the at close to normal levels throughout
coronavirus pandemic. the pandemic.
Summary In this chapter, we use our
projections for the gross value added
£75.6bn in the previous year. This
fall is relatively muted, compared
of the financial services sector in the with the expected falls in the tax
year to 31 March 2021 to project contribution of other sectors, due to
the TTC of the sector over the same the sector’s resilience to the worst
period. We project that the TTC of economic effects of the virus.
the sector will fall to £73.4bn in the
year to 31 March 2021, down fromChapter 3
Total tax contribution
of the financial services
sector in 2020
We carried out a survey of FS The results of the survey can be This chapter explores how ways
companies to understand the found in this chapter. We estimated of working in financial services
contribution they make to the that in the year to 31 March 2020, firms are changing as automation
UK public finances through their the total tax contribution from the increases, which has been
taxes, and to support the economic FS sector was £75.6bn – amounting accelerated by the pandemic.
analysis in this report. to more than 10% of total
We look back at the increasing
government receipts from all taxes.
While corporation tax is often significance of employment
This includes £34.1bn in taxes borne
the focus of attention, the largest taxes over the past decade and
directly by FS firms and £41.5bn in
element of the TTC is employment the decreasing significance of
taxes collected from FS employees
taxes, followed by corporation tax corporation tax. We consider
and customers. Employment taxes
and VAT. The survey looks beyond what this means in a pandemic,
make up 45% of the FS sector’s
corporation tax to estimate the TTC where taxes not linked to profits
TTC – a contribution of £34.5bn or
of companies in the sector, including become a more significant part
11.1% of all government receipts
other taxes such as employment of the TTC, leading to stability in
from employment.
taxes, VAT and stamp duty. the contribution.The total tax contribution of UK financial services in 2020 23
Key components of
the total tax contribution
We estimate that the UK financial
services sector’s TTC was around
£75.6bn in the year to 31 March 2020,
representing 10.1% of government
receipts for all taxes. This estimate
uses data on tax payments provided
by the 53 companies participating in
the 2020 study and extrapolates this
to the sector as a whole, as set out in
Figure 10.
Figure 10: Total tax contribution of the UK FS sector in the year to 31 March 2020
FS companies in Extrapolated to % of government
the study 2020 the FS sector 202011 receipts 202012
£billions £billions %
Corporation tax £3.8bn £11.8bn
Bank surcharge £0.9bn £1.5bn
Bank levy £2.2bn £2.5bn
Other taxes borne £9.6bn £18.3bn
Total taxes borne £16.5bn £34.1bn 4.6%
Total taxes collected £18.0bn £41.5bn 5.6%
Total tax contribution £34.5bn £75.6bn 10.1%
11 The extrapolation totals for taxes borne, taxes 12 Government receipts are from: Office for Budget
collected and TTC are estimates. We extrapolate survey Responsibility (OBR) Economic and fiscal outlook,
data to obtain taxes borne and taxes collected (which alongside Budget 2020, Table 2.8 Current receipts
in turn add up to TTC). Extrapolation is based on survey (on a cash basis).
trend data and HMRC figures for corporation tax, bank
surcharge and bank levy receipts paid by the financial
services sector. We use the ratios of (1) corporation
tax, surcharge and bank levy to taxes borne; and (2)
corporation tax, surcharge and bank levy to taxes
collected for different FS subsectors, as established
in the study. HMRC figures can be found in HMRC
T11.1A Corporation tax, bank levy and bank surcharge net
receipts 2020 and adjusted for the change to Quarterly
Instalment Payments in 2020.A look at the key components of
financial services firms’ total tax
contribution shows that employment
taxes make up the largest
contribution from the sector
(44.5%), followed by corporation
tax including surcharge (15.3%)
and VAT (14.8%) (Figure 11).
Figure 11: Key components of financial services total tax contribution in 2020
0.1%
Others 44.5%
All employment taxes
2.1%
Business rates
2.6% 15.3%
Stamp duty
Corporation tax
(inc. bank surcharge)
2.8%
Bank levy
8.5% 14.8%
Tax deducted at source VAT
9.2%
Insurance premium tax
Source: Survey participants. Chart shows the average result.13
The TTC comprises taxes borne and These taxes are collected from
taxes collected. Taxes borne are employees as well as customers,
all the taxes levied on a company, and companies are responsible for
which are a cost to the business and administering and paying these taxes
will affect its financial results, such to the government. Employee income
as employer National Insurance tax and net VAT are examples of
contribution (NIC) or corporation tax. taxes collected. We look at these in
more detail on the following page.
Taxes collected are generated from
the jobs FS companies create and the
services they provide to customers,
and are part of their indirect
contribution to tax revenues.
13 The methodology gives equal weight to each
company included and the profile for individual
subsectors may differ.The total tax contribution of UK financial services in 2020 25
Taxes borne in 2020
Employment taxes remain the largest
component of taxes borne (30.9%),
closely followed by corporation
tax including bank surcharge
(28.6%) (Figure 12).
Figure 12: Taxes borne by FS companies in 2020
0.7% 30.9%
Other
Employment taxes
3.4%
Stamp duty
4.9%
Bank levy
6.0% 28.6%
Business rates Corporation tax
(inc. bank surcharge)
25.6%
Irrecoverable VAT
Source: Survey participants. Chart shows the average result.
Note: Employment taxes borne include employers’ National Insurance contributions (NIC), PAYE settlement agreements (PSA) and net apprenticeship levy.
Some taxes borne are sector- In short, while much attention is
specific, such as the bank levy and focused on the corporation tax paid
the bank surcharge. Other taxes, by companies, this is not the largest
such as irrecoverable VAT, while not or only tax borne. For every £1 of
exclusive to the FS sector, represent corporation tax paid, £2.48 is paid
a significant share of these firms’ in other taxes borne.
taxes borne (25.6%).14 Irrecoverable
VAT arises because many financial
services activities are VAT exempt,
so companies cannot recover the
VAT they incur on their purchases.
14 For further details of individual taxes, please see the
glossary in Appendix 3.Taxes collected in 2020
Figure 13 shows the profile of the
71.2%
taxes collected by the companies
in the study. Similar to taxes borne,
employment-related taxes make up
the largest element of taxes collected of taxes collected are from
by the FS sector. Employee income employee income tax and
tax (60.0%) and employee National employee National Insurance
Insurance contributions (11.2%) contributions.
account for close to three quarters
of taxes collected.
This is followed by taxes deducted at
source (12.5%), such as tax deducted
from annuities paid by life insurers,15
and sector-specific taxes, such as
insurance premium tax (6.3%), a
tax collected by general insurance
companies on insurance premiums.
Figure 13: Taxes collected by FS companies in 2020
2.7%
Stamp duty reserve tax 60.0%
Employee income tax (PAYE)
6.3%
Insurance premium tax
7.2%
Net VAT
11.2%
Employee NIC
12.5%
Tax deducted at source
Source: Survey participants. Chart shows the average result.
15 See the glossary in Appendix 2 for details
on different taxes.The total tax contribution of UK financial services in 2020 27
The significance of employment
in the financial services sector
Employment and job creation are As ways of working in the sector
important ways in which the FS sector change, a result of both the pandemic
contributes to the UK economy. and, more broadly, from advances
As the previous section showed, in technology, the contribution
employment taxes account for the made by the sector in employment
largest share of taxes borne and taxes may also change. While jobs
collected by FS companies. These will be created in areas such as
taxes provide a more stable source fintech, there will be losses in others,
of revenue for the government than including high-street bank branches.
corporation tax receipts, which
can be volatile, particularly in the
aftermath of the pandemic.
Employment taxes paid by the
financial services sector as a whole
Using our study data, we estimate Another way of looking at this is the
16 Extrapolation has been carried out using average
that the FS sector generates total amount paid to the public finances employer NIC per employee, employee NIC and PAYE
per employee for the employees in different subsectors
employment taxes of around in employment taxes for every of the study, together with trends in employment taxes
£34.5bn.16 In total, the sector employee. Employment taxes per per employee. Extrapolation is an estimate only.
employed 1.1m people17 on employee amounted to £31,62021 17 Office for National Statistics, Labour market overview,
UK: October 2020 – Financial & insurance activities.
31 March 2020, an increase of 0.4%18 on average, including taxes borne by
over the previous year. Employment the companies and those collected 18 Between March 2019 and March 2020. Office for
National Statistics, Labour market overview, UK: October
in the sector represents 3.2% of the from employees. 2020 – Financial & insurance activities.
total UK workforce,19 but generates 19 March 2020. Office for National Statistics,
11.1%20 of government tax receipts Labour market overview, UK: October 2020 – Financial &
insurance activities.
from employment, emphasising the
20 Calculation of the proportion of government receipts
sector’s contribution in skilled jobs. is the extrapolated employment taxes as a percentage
of government receipts for income tax under PAYE
(excluding self-assessment) and all NIC receipts. Total
government receipts are obtained from the Office for
Budget Responsibility (OBR), November 2020 Economic
and fiscal outlook – supplementary fiscal tables: receipts
and other, Table 3.3 Current receipts (on a cash
basis – forecast).
21 The average employment tax per employee was
calculated by taking the total employment taxes for
the survey population and dividing it by the total
number of employees in the population.Changing ways of working
as a result of new technologies
Advances in digitisation and all high-street bank branches, Looking forward, some jobs will be
technology are changing ways of encouraging those who were lost due to automation, but others
working in the FS sector and reducing initially reluctant to move to will be created. The fintech workforce
face-to-face provision of services. telephone or online services to try in financial services is projected
While this has been a developing a new method of banking. Having to increase, focusing on emerging
trend in recent years, the pace of made the transition, this is likely to technologies including blockchain,
change has accelerated during lead to a permanent change. artificial intelligence (AI), machine
2020 as COVID-19 lockdowns learning, robotics and the cloud.
For employees, the FS sector’s
necessitated remote working and With automation comes enhanced
investment in technology
virtual interaction with customers. risk of cyber attacks, fraud, money-
infrastructure in recent years
laundering and data misuse, which
Technological development has has allowed it to respond to the
will require experts in cyber security.
already influenced employment in pandemic in an agile way. Many
Current employees will be able to
the financial services sector over the employees were able to work from
upskill in data analytics, and AI will
past decade, particularly with the home with minimal disruption, which
take on repetitive tasks, allowing
growth of online services contributing meant the sector avoided the worst
workers to focus on more rewarding
to the closure of high-street bank economic impacts. The fact that FS
aspects of their job.
branches. However, the associated businesses have been able to carry
job losses have largely been on through the pandemic shows that The contribution that the FS sector
restricted to the lower end of the pay there is a way forward in the face makes through employment and
scale and have been offset by the of disruption. employment taxes is significant
creation of new jobs over this period. and emphasises the importance
In part, giving employees freedom
So the overall effect on employment of ensuring that the UK remains a
and flexibility has helped them to
and employment taxes has been competitive business environment
adapt to disruption, and there is the
relatively minor to date. Data from for financial services in the future.
potential for FS companies to tap
the ONS shows an increase in
into previously inaccessible skills
employment in the FS sector of 0.4%
and talent. However, if employees
in the year to 31 March 2020.
no longer need to be physically
The pandemic has accelerated the present in their workplace and can
impact of automation for customers increasingly be drawn from a global
and employees. For customers, talent pool, this has implications for
lockdown meant the closure of employment taxes.The total tax contribution of UK financial services in 2020 29
Resilience as a result of a changing
profile of taxes
This section looks back and explores Figure 14: The changing profile of taxes from 2007 to 2020 – taxes borne
how the profile of taxes borne
has changed over the past decade
100%
to become more dependent on 6.5% 4.9%
employment taxes and less on profit 10.8%
6.0%
3.4%
taxes. While this means the TTC is
80% 25.6%
more stable when profits are low, 19.1%
as during the pandemic, the total
tax rate – a measure of taxes borne
compared with profit – will increase. 60%
21.3%
30.9%
Non-profit-related taxes 40%
now account for 40.8%
71.4%
28.6%
20%
of taxes borne.
0%
2007 2020
This is the latest in a series of TTC Corporation tax Employment taxes borne Irrecoverable VAT Stamp duties
studies carried out for the City of Business rates Bank levy Other taxes borne
London Corporation. Compared
with the first study, which was
Source: Survey participants providing data in each year.
conducted in 2007, we can show
how the make-up of financial
services tax contributions have
changed over time. Figure 14 shows that the sector’s an influence on the tax profile,
tax profile has shifted away from particularly for irrecoverable VAT,
taxes that are more dependent which also increased. For example,
on profit, such as corporation tax, following the financial crisis, FS
towards taxes that are a more stable companies have invested in IT
revenue source for the government, and infrastructure, outsourced
such as employment taxes. In 2007, administrative business functions
corporation tax was 40.8% of total and moved towards employing
taxes borne, while employment taxes more contractors, all of which
accounted for only 21.3%. has increased the cost base and
driven up irrecoverable VAT.
By 2020, this had changed, with
In addition, new taxes that are
employment taxes accounting
not profit-related have been
for the largest share of all taxes
introduced, such as the bank levy
borne (30.9%), and corporation tax
and the apprenticeship levy.
(including surcharge) decreasing
to 28.6%. This changing profile was The outcome is that non-profit-
driven by a decrease in statutory related taxes now account for
corporation tax rate and the legacy 71.4% of taxes borne, compared with
of the financial crisis. 59.2% in 2007. In pandemic times,
this profile means that, as profits
An increase in the rate of NIC
fall, the TTC will fall to a lesser
increased employment taxes over
extent, a finding that supports the
the same period. Changing
economic analysis.
operational models also hadTax payments as a share
of profit and turnover
The FS sector pays 38.9% of its profits profit, while payments of the other
in taxes. We call this the total tax rate taxes borne remained more stable,
(TTR), a measure of the cost of taxes increasing the TTR as a result.
borne in relation to profit. Figure 15
In the years following the financial
shows the trend in TTR over time.
crisis, as the economy recovered,
In the 2009 study, the average TTR
profits increased, causing the TTR to
rose sharply above the rate in the
decrease. We may expect to see the
first study (in 2007). This was due to
TTR increase following the pandemic,
profits falling markedly between the
a reflection of the significance of non-
two years as a result of the financial
profit-related taxes and an indicator
crisis. In this period, corporation tax
of resilient total tax contributions.
payments fell in line with declining
Figure 15: Trend in TTR
60%
50%
40%
30%
20%
10%
36.4% 57.4% 48.5% 47.5% 39.5% 42.5% 39.0% 30.2% 35.8% 36.3% 38.9% 42% 38.9%
0%
2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Survey participants.
Focusing on turnover, more than a The FS sector plays a significant role
quarter of turnover is paid in taxes in the UK government’s tax receipts,
borne and collected. On average, for with employment taxes remaining
the participants in the study, TTC as a the most important component of
percentage of total UK turnover was this total. The pandemic, together
26.5%, comprising 11.7% of taxes with advances in technology, will
borne and 14.8% of taxes collected. affect the tax base in different ways.
The percentage in 2020 is the highest It is important, given this uncertainty,
level since the survey began; for to ensure that the UK remains a
every £100 of turnover, an amount competitive business environment
equivalent to £26.50 is paid in taxes. for the FS sector in the UK.The total tax contribution of UK financial services in 2020 31 Looking forward The FS sector makes a substantial interact, physical location will become contribution to the public finances less important. Technology is not through taxes, but there have been bound by international borders and changes to the make-up of the a competitive business environment contribution over the past decade. is increasingly important, particularly While the survey showed that the in a sector where a significant part contribution for the latest year was of the TTC arises from employment more than £75bn, looking forward, taxes. The dependence of the FS the pandemic and changing ways sector’s TTC on non-profit-related of working will create challenges taxes such as employment taxes for the sector. As new ways of indicates that the level of TTC is working emerge, and employees and likely to be sustained through customers use more technology to the pandemic. Manchester city centre
Appendix 33 Appendix 1 – 2021 TTC projection methodology 34 Appendix 2 – 2020 TTC survey results and methodology 36 Appendix 3 – Glossary of taxes
The total tax contribution of UK financial services in 2020 33
Appendix 1 – 2021 TTC projection methodology
To investigate the impact of the gross log of real GVA over the same time Technical annex model 1.1
value added (GVA) of the financial period (GVAt), and the log of the real
services (FS) sector on its total tax TTC in the previous year (TTCt-1). Our
TTCt = β0 + β1G V At + β2TTCt-1 + λt + εt
contribution (TTC), we estimate a model also includes a full set of year
linear regression using ordinary least effects (λt) to absorb aggregate time where εt denotes an error term.
squares. We regress the log of real series variation.
TTC in each year (TTCt) against the
Technical annex table 1.1: Variables included in our modelling specification
Variable Definition Data source
Log of the total tax contribution City of London
Dependent variable TTCt
of the FS sector at time t & PwC analysis
Log of the gross value added of
Explanatory variables G V At ONS
the FS sector at time t
Log of the total tax contribution City of London
TTCt-1
of the FS sector at time t-1 & PwC analysis
λt Yearly time effects N/A
The results from our analysis are Technical annex 1.1: Key drivers of FS sector total tax contribution
set out in Technical annex 1.1.
The key variable of interest is ‘Log 2.0
of GVA’, which has a coefficient
of 0.96. This represents the 1.5
‘tax buoyancy’ of the financial
services sector, indicating that
1.0 0.96
a 1% increase/decrease in the
gross value added of the sector
Variable coefficient
0.5
will increase/decrease its total tax
contribution by 0.96%. As GVA is
0.03
expected to decline by 3.1% in 0.0
the year to 31 March 2021, our
estimated tax buoyancy of 0.96 -0.5
suggests that TTC will decline -0.73
by a comparatively smaller 2.9%. -1.0
The TTC of the sector in the
year to 31 March 2020 was equal -1.5
to £75.6bn, so this fall of 2.9% Log of GVA Log of year prior’s TTC Time effects
equates to a TTC of £73.4bn in
the following year.
Source: PwC analysis.Appendix 2 – 2020 TTC survey
results and methodology
Data was provided by 53 FS The 53 companies in the sample
53
companies on all their UK tax include different financial services
payments for accounting periods in subsectors: banks (including UK,
the year ending 31 March 2020. foreign and challenger banks),
companies provided data on The results are a measure of cash insurers (including life and general)
all their UK tax payments for taxes paid, covering both taxes borne and other financial services sectors
accounting periods in the year by companies and taxes collected (asset managers, including real estate
ending 31 March 2020. from employees and customers. assets, and investment services).
The 53 firms participating in the
PwC has anonymised and
survey employ 37% of total UK FS
aggregated the data provided
employees. Figure 16 below provides
by the FS companies to produce
a detailed breakdown of participants
the study results. PwC has not
by sector.
verified, validated or audited the
data and cannot therefore give any Figure 17 on the next page provides
undertaking as to the accuracy of the the figures for taxes borne and
study results. Where we refer to data collected for our survey participants.
published by the government and
HMRC, this is clearly indicated.
Figure 16: Survey participation by sector22
5.8% 21.2%
Other financial services Investment bank
7.7%
Real estate
9.6% 19.2%
Life insurance Insurance
11.5%
Challenger bank
13.5%
Retail bank
11.5%
Asset manager/investment services
Source: PwC analysis.
22 The real estate subsector includes those acting as
asset managers of real estate assets.You can also read
