Former minister for finance Paschal Donohoe reversed a decision that officials said could create “more of a level playing field” in the operation of the State’s €200 million-a-year bank levy.

In pre-budget advice drawn up by civil servants last September, Mr Donohoe was asked to consider a change to the methodology used to calculate the levy, which would have benefited PTSB.

The bank levy was first put in place in 2014 in order to claw back some of the funds injected by the State into the banking sector during the financial crisis.

The change would have meant a higher levy imposed when a bank hit a certain level of profitability, above €450 million.

As a less profitable institution, this would have reduced the proportional burden on PTSB, with officials outlining that the lender contributes a “significantly higher proportion to the levy relative to their operating profit” compared to other institutions.

Mr Donohoe was told by officials that introducing so-called profitability bands “could create more of a level playing field between the levy paid and the operating profits before tax”.

He was warned, however, that “the bigger banks [AIB and Bank of Ireland], who will have to pay a higher contribution, may be unhappy with it”.

AIB, its subsidiary EBS, and Bank of Ireland are levied at a rate equivalent to between 2 and 5 per cent of their operating profits, according to the note, but the rate for PTSB is close to 15 per cent.

Last November, State-controlled PTSB put itself up for sale. The Republic has a 57 per cent holding in the lender.

“It is difficult to justify having the smallest retail bank pay proportionately more of its profits, particularly as it is trying to grow to a profitability level where it can generate organic capital needed to further grow its loan book and support lending into the economy,” Mr Donohoe was told.

Officials added that the PTSB business model was “significantly less diversified than the pillar [AIB and Bank of Ireland] banks and it is a significantly smaller institution”.

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He agreed to the proposal, records released under the Freedom of Information Act show. However, come budget day there was no mention of the change in his speech and there was no change in the Finance Bill, which gives legal effect to decisions made on budget day.

The budget did extend the bank levy for one year and made some technical changes to its operation.

The Department of Finance has said it has no information on why the change was not included in the final reckoning on budget day. “This matter was raised with the minister. And while he initially indicated that it should be advanced, he subsequently determined that it should not be proceeded with,” the department said.

A spokesman said Mr Donohoe did not engage with the banks or their lobby groups on the matter before the budget.

Due to accumulated losses piled up by the banks at the time, they do not pay corporation tax as it can be offset against historic losses.

Initially, the levy was set at a percentage of the deposit interest retention tax paid by the banks in a specified year. It was revised in recent years and imposed as a stamp duty charged at a rate of 0.122 per cent of the total amount of deposits held by them at the end of 2022.

Bank of Ireland said it was unaware of the mooted change, and reiterated its position that the original rationale for the levy no longer stands and it should be allowed to expire.

AIB had no comment when contacted, PTSB also declined to comment.