Chancellor John Healey is planning to increase taxes on the banking sector, according to senior banking executives who spoke to the BBC. Healey has referred to banks as part of 'the crown jewels' of the UK economy, but banking leaders have indicated that tax increases will be 'on the menu' at the upcoming Budget in two weeks. The four largest banks in the UK reported approximately £15 billion in profits during the first half of this year, prompting trade unions to advocate for additional taxes on the sector.
The trade body for the banking sector, UK Finance, has cautioned that further increases in bank taxes could weaken competitiveness, deter investment, and hinder job creation, potentially conflicting with the government's goal of fostering growth across the country.
There are several methods through which the Chancellor could raise additional revenue from banks. One possibility includes reversing a reduction in the surcharge on corporation tax that banks pay, which was lowered from 8% to 3% in 2023 by former Chancellor Jeremy Hunt. Critics have pointed out that this tax cut coincided with an increase in the corporation tax rate from 19% to 25%.
Another option is to increase the bank levy, a small percentage charged on loans. In a statement made in Bangkok, Healey acknowledged the significant role banks play in the UK economy and noted that he has 'decisions to take in the Budget.' He stated, 'My observation on the banks is that people too often see them as big, distant financial institutions, when they are hardwired into the economic fabric of this country and our future prospects.'
Following these developments, shares in Lloyds and NatWest declined on Friday amid expectations of tax hikes affecting the sector. Historically, banks have argued that higher taxes could render the UK less competitive compared to other regions and limit their lending capacity, which they claim would be detrimental to economic growth.
Sir Philip Augar, a former banker and author, expressed to the BBC's Today programme that there is 'room for a moderate increase' in taxes on banks that could potentially generate up to £3 billion annually. He noted that banks are currently benefiting from favorable conditions due to rising interest rates, which enhance their profit margins.
Augar further commented that banks cannot be considered 'too big to fail' while simultaneously being 'too big to tax.' Paul Nowak, general secretary of the Trades Union Congress, highlighted that the four largest banks in Britain are generating profits of around £1 billion per week, with bonuses reaching post-financial crisis highs. He stated, 'These are bumper profits - driven by high interest rates and households' mortgage misery,' and emphasized the need for banks to contribute their fair share of taxes.
In the previous Budget, banks were relieved to avoid being targeted despite their substantial profits in recent years. Another potential avenue for tax revenue discussed with Treasury officials involves limiting banks' ability to offset past losses against current profits, a practice that has significantly benefited institutions like Lloyds. Some analysts and banking executives have suggested a temporary moratorium on this practice, which could yield an estimated additional £1 billion annually for the Treasury.
This approach could also alleviate pressure on foreign banks operating in the UK, such as JP Morgan, whose CEO Jamie Dimon has cautioned that the UK already imposes one of the highest tax burdens on banks globally. He warned that further sector-specific taxes could deter investment and undermine competitiveness.
Industry leaders have expressed concerns that any tax increase affecting UK banks while exempting foreign banks would contradict the government's commitment to support British businesses. A Treasury spokesperson stated, 'As has always been the case, decisions on tax are a matter for the chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals.'