What Is a Bank Levy?

A bank levy happens when your bank account gets frozen while the money in your account gets taken away from you. This usually happens when you do not pay your taxes or debt.

Typically, government agencies (like the IRS) make use of a bank levy, using it to collect unpaid taxes. They will freeze your account, and they take money equal to the amount that is owed. When your account is under a bank levy, you will not access your funds until the entire debt is paid back.

Bank Levy by Creditors

Outside of the UK, a creditor that obtains a court judgment against a debtor may have the court issue a bank levy. The bank levy allows a bank to freeze the account(s) 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 accounts.

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 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 also use this method. Private creditors typically need a legal court order to proceed with a bank levy, but the IRS normally does not. Usually, the debtor is not given a warning by their bank or the creditor that their account will be frozen. At this stage, the creditor will have already made numerous attempts to collect the debt, so the debtor should be aware of the situation they are in.

In most cases, a debtor can dispute the levy, which may prevent the levy or reduce the amount the creditor can access. Reducing the amount so that the creditor does not have access to all the funds in an account is an essential aspect for a debtor, as they could lose any cash needed to pay for important items such as food and rent.

Bank Levy: changes to the scope and administration

General description of the measure

From 2021, the Bank Levy will be chargeable only on the UK balance sheet equity and liabilities of banks and building societies. Broadly, this means that overseas activities of UK headquartered banking groups will no longer be subject to the Bank Levy.

The measure also provides for UK equity and liabilities subject to the Bank Levy to be reduced in various circumstances. For example, a UK bank holds certain types of ‘losing investments in an overseas subsidiary.

In addition, various other changes and administrative simplifications to the Bank Levy will apply from 2018, including the process under which groups nominate a member to meet their Bank Levy obligations and to rules governing the shared liability of group members for Bank Levy amounts.

Policy objective

These changes are part of a more comprehensive package of measures that will provide a sustainable basis for raising revenue from the banking sector in the long term while recognizing developments in the regulatory and resolution regimes that apply to banks. The measure also includes changes to simplify the administration of the Bank Levy.

Background to the measure

The Bank Levy was introduced in 2011. Its purpose is to ensure that banks and building societies make a fair contribution, reflecting the risks they pose to the financial system and the broader UK economy. The Bank Levy was also designed to create appropriate incentives to encourage banks to move away from riskier funding models.

Summer Budget 2015 set out a long-term plan for taxation of the UK’s financial services industry. This balanced the need to ensure that the financial sector remains robust, highly competitive, and open for business against the ongoing need for banks and building societies to make an appropriate tax contribution that reflects their unique risks to the UK financial system and the broader economy.

The plan included introducing a new 8% Corporation Tax surcharge on banking sector profits from 1 January 2016 and a phased reduction of the Bank Levy rate between 2015 and 2021. In addition, to reflect significant changes in international regulation and resolution planning that reduce the risk of overseas banking operations to the UK, a change in the scope of the Bank Levy was announced. Therefore, the Bank Levy will only be chargeable on UK balance sheet equity and liabilities from 2021.

In December 2015, the government published a consultation setting out objectives for the change to the scope of the Bank Levy from 2021, as well as proposals for delivering these objectives in legislation.

In December 2016, the government responded to this consultation and set out detailed proposals for changes to the Bank Levy and areas in which it believed further work and discussion with interested parties as necessary.