The research shows that overall risk in the UK banking sector has now decreased, with many banks having made substantial reductions in the size of their balance sheets as well as holding increased levels of capital to meet the new regulatory requirements introduced along with the levy.

Tom Aston, head of banking tax for KPMG in the UK, said: ‘However, the other aim of the tax was to raise £2.5bn a year and so, as balance sheets have shrunk, the rate of the tax has been steadily increased (seven times now) to try to maintain the tax take.  Our figures therefore show that the Bank Levy is now draining profits out of the banks and undermining efforts to strengthen their capital base.’

KPMG’s calculations suggest the UK Bank Levy charge across the top five UK banks increased from £1.2bn in 2011 to £1.65bn in 2013, an increase of 36%.  Adding the Bank Levy to Corporation Tax charges gives a total effective tax rate of 36% in 2011 and 71% in 2013. 

Despite this, KPMG says analysis suggest the government is likely to undershoot its £2.5bn revenue target for Bank Levy receipts in 2013 by approximately £400m.

Aston said: ‘The government announced a new consultation on the design of the Bank Levy in last week’s budget and we understand this will focus on how Levy charges can be fixed in a banding system to simplify budgeting for individual banks and to assist HMRC in estimating yield.’

However, the research findings indicate that ‘the burning issue is not getting budgeting right, but rather addressing the overall burden that the Levy is imposing on the shrinking UK banking sector - a burden that is now out of balance with its initial policy objectives.’

Meantime, trust in the banking sector was hit again this week as the Co-Operative Group announced further writedowns to cover past issues with accounting irregularities and reporting issues.