UK banks face potential tax increases in the coming Budget, according to senior banking executives who have told the BBC that sector taxation will be "on the menu" when Chancellor John Healey sets out fiscal plans in two weeks.
The four largest UK banks collectively earned about £15bn profit in the first half of this year. The Trades Union Congress has called for additional taxes on banks, with general secretary Paul Nowak stating that the four biggest banks are making a billion pounds a week while noting that bonuses have reached post-financial crisis records. "Now it's time to make sure banks pay their fair share," Nowak said.
Despite Healey describing banks as part of "the crown jewels" of the UK economy, market reaction has been swift. Shares in Lloyds and NatWest fell more than 2% on Friday on expectations of tax hikes, though Barclays and HSBC rose slightly because their large international operations would be less affected by UK-specific tax changes.
The Treasury is considering several options. The most likely approach involves reversing a 2023 reduction in the surcharge that banks pay on corporation tax, which was cut from 8% to 3% under then-Chancellor Jeremy Hunt. This reversal could raise around £2bn, though Treasury officials are reportedly leaning toward this option because it is simpler to modify an existing tax than to impose a new windfall tax.
However, the previous government reduced the surcharge because officials feared that an 8% surcharge on top of 25% corporation tax would make UK banks uncompetitive against European and US rivals. The Treasury may therefore raise the surcharge but not return it to the full 8% level.
Other options include raising the bank levy or imposing a moratorium on banks' ability to use past losses to offset profits, which could yield approximately £1bn annually. This approach would particularly affect Lloyds, which has benefited from offsetting losses from the financial crisis.
UK Finance, the sector trade body, warned that "further increases in bank taxes would weaken competitiveness, discourage investment and job creation, and work against the government's ambition to deliver growth in every postcode". JPMorgan's chief executive Jamie Dimon has similarly cautioned that the UK already has one of the highest tax burdens on banks globally.
Sir Philip Augar, a former City banker, told the BBC that there was "room for a moderate increase" that could raise up to £3bn annually, noting that banks are currently enjoying "booming conditions" from higher interest rates that expand lending margins.
A Treasury spokesperson declined to comment on specific proposals, stating that tax decisions are for the chancellor to announce at fiscal events.