Banks brace for higher taxes in upcoming Budget

Chancellor John Healey is preparing to raise taxes on the banking sector, according to senior banking executives who spoke to the BBC. Healey has described banks as part of “the crown jewels” of the UK economy, but industry leaders warned that the sector will be “on the menu” when the Budget is delivered in two weeks.

The four largest banks together recorded roughly £15bn of profit in the first six months of this year, prompting trade unions to call for additional taxation. UK Finance, the trade body for the sector, cautioned that further increases in bank taxes would weaken competitiveness, discourage investment and job creation, and run counter to the government’s goal of delivering growth in every postcode.

Shares in Lloyds and NatWest fell on Friday, each dropping more than 2% as investors anticipated a tax hit. Barclays slipped only slightly, while HSBC rose, reflecting their larger international operations which would make them less sensitive to a UK‑only tax increase.

What the Budget could contain
There are several ways the chancellor could extract more money from banks. One option is to reverse the reduction in the bank surcharge on corporation tax that was cut from 8% to 3% in 2023 by former Conservative chancellor Jeremy Hunt. Critics argue this would be unfair because the cut coincided with a rise in the headline corporation tax rate from 19% to 25%.

Healey could also increase the bank levy, a small percentage applied to loans. The BBC understands that the Treasury prefers to adjust the existing surcharge rather than introduce a new windfall tax, as it is simpler to amend a current measure.

Reinstating the 8% surcharge would generate about £2bn. However, the previous government had concluded that adding an 8% surcharge on top of a 25% corporation tax would put UK banks at a disadvantage compared with European and US rivals, so any increase might fall short of the full 8%.

Speaking in Bangkok, Healey praised the role banks play in the British economy. He said he has “decisions to take in the Budget” and added: “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.”

Historically, banks have argued that higher taxes would make the UK less competitive and reduce their capacity to lend, which would hinder growth.

Sir Philip Augar, an author and former City of London banker, told the BBC’s Today programme that there is “room for a moderate increase” in taxes on the sector that could raise up to £3bn a year. He noted that lenders are enjoying “booming conditions” thanks to higher interest rates, which boost profits by widening the margin between lending rates and savings rates.

Sir Philip added that when the banking sector “hits really rocky times it expects the taxpayer to bail them out - when it hits boom times, it expects some kind of special treatment”. He stressed that banks cannot be both “too big to fail and too big to tax”.

Paul Nowak, general secretary of the Trades Union Congress, said Britain’s four biggest banks are earning roughly a