Chancellor John Healey is expected to target the banking sector with additional taxes in the October Budget, senior banking executives told the BBC on Thursday. The UK's four largest banks made around £15bn profit in the first six months of this year, prompting calls from trade unions for higher levies.
Banks currently pay a 3% surcharge on top of the 25% corporation tax rate, plus a levy on balance-sheet assets. The sector contributed nearly £40bn to the Treasury last year when employee income tax is included. The bank levy generated £1.4bn and the surcharge a further £1.2bn.
The chancellor could restore the surcharge to its previous 8% level, which was cut from that rate under Rishi Sunak when corporation tax rose from 19% to 25%, raising around £2bn annually, the BBC reported. Another option discussed with Treasury officials is a temporary freeze on banks using past losses to offset current profits, which could yield an estimated £1bn per year. Lloyds has been a major beneficiary of this practice, using financial-crisis losses to lower tax bills since.
The bank levy currently charges 0.1% on outstanding short-term loans and 0.05% on longer-dated loans, although mortgages are excluded from the calculation. In the past banks have successfully argued that higher taxes would risk making the UK uncompetitive with other jurisdictions and would reduce their ability to lend.
Banks were pleasantly surprised they were not hit at the last Budget, given the large profits they have been making in recent years. Rising interest rates have expanded the margin between the rate at which they lend to customers and the rate they pay savers.
UK Finance, the sector's trade body, warned that further increases in bank taxes would weaken competitiveness, discourage investment and job creation, and work against the government's growth ambitions. JP Morgan chief executive Jamie Dimon said the UK already has one of the highest tax burdens on banks globally and that additional sector-specific taxes could discourage investment and damage competitiveness.
Industry leaders say any form of tax rise that hits UK banks and exempts foreign banks' operations in the UK would be hard to square with the government's push to back British business. Whatever form it takes, banks believe the chancellor now has much more of an appetite to take a larger slice of their pie.
Why it matters for wealth
Higher bank taxes will compress sector margins and may depress share prices of UK-listed financial institutions in portfolios. Any loss-offset freeze hits domestic banks harder than foreign operations, creating asymmetric exposure for investors holding UK names. The move also signals Treasury appetite for targeted levies on profitable sectors, a pattern relevant to tax planning for other high-margin holdings.
What to watch
The Budget statement in two weeks will clarify whether the surcharge rises, the loss-offset rule changes, or both measures are deployed.
Source: BBC News
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