The key facts
- Chancellor John Healey, according to the BBC citing bank executives, plans to raise taxes on the banking sector in the budget in two weeks.
- Options: reversing the corporate tax surcharge cut from 3% to 8% (~£2bn), raising the bank levy, or a moratorium on loss carry-forwards (~£1bn a year).
- Shares in Lloyds and NatWest fell more than 2%; the industry and trade unions hold opposing positions.
Banks brace for tax rises
Chancellor John Healey plans to increase taxes on the banking sector, senior bank executives told the BBC. Although Healey has called banks part of the 'crown jewels' of the British economy, industry leaders said the sector would be 'on the menu' at the budget, which takes place in two weeks. The Treasury officially declined to comment: its spokesperson said the chancellor announces tax decisions at fiscal events, not in comments on rumours and speculation.
Scale of profits and positions of the parties
The four biggest banks in the UK collectively earned about £15bn in profit in the first six months of this year. Trade unions are demanding additional taxes: TUC general secretary Paul Nowak said the 'big four' earn a billion pounds a week and bonuses are at record levels since the financial crisis, calling the profits 'bumper' — driven by high interest rates and households' 'mortgage misery'. Former banker Sir Philip Augar estimated the potential of a 'moderate increase' at up to £3bn a year, noting that banks cannot be simultaneously 'too big to fail and too big to tax'. The industry association UK Finance opposes: in its view, higher taxes would weaken competitiveness and reduce investment and job creation.
Possible mechanisms
Several options are being considered. The first is reversing the cut in the bank surcharge on corporate tax from 8% to 3%, introduced in 2023 by Conservative chancellor Jeremy Hunt; a full reversal would raise about £2bn, but the previous government believed a combined rate of 33% would weaken the position of British banks against European and American competitors, so the surcharge may not be raised all the way. Critics note that the 2023 cut coincided with the rise in corporation tax from 19% to 25%. The second option is raising the bank levy, a small percentage charged on loans. According to the BBC, the Treasury is leaning towards changing the surcharge, since amending an existing tax is easier than introducing a new windfall tax. The third option is a multi-year moratorium on carrying forward past losses against current profits (something Lloyds actively used due to financial crisis losses), which could bring in about £1bn a year; one bank executive called it 'far more palatable'.
Market reaction and international dimension
On Friday, shares in Lloyds and NatWest fell more than 2%, becoming among the biggest losers on the UK market on expectations of tax rises. Barclays slipped slightly, while HSBC rose — both companies have large international businesses and are less dependent on British taxes. A moratorium on loss carry-forwards would also affect foreign banks, including JP Morgan; its chief Jamie Dimon previously warned that the UK already has one of the highest tax burdens on banks in the world, and additional sector taxes could deter investment. At the same time, industry leaders point out that raising taxes only on British banks while exempting foreign ones would be hard to reconcile with the government's stated support for British business. In the past, banks have successfully argued that higher taxes would make the UK uncompetitive and reduce lending. Speaking to the press in Bangkok, Healey said he had 'decisions to make in the budget' and that banks are 'hard-wired into the economic fabric of the country', although they are often seen as 'big, distant financial institutions'.
Image source, Reuters
