UK Banks Brace for Higher Taxes in Autumn Budget
Senior bank executives expect the sector to be targeted as the chancellor prepares fiscal plans, with reversing a 2023 surcharge cut seen as the likeliest option
By AXY Business Desk ·
Key points
- Senior banking executives told the BBC they expect the sector to face higher taxes in the Budget later this month.
- The Treasury is reportedly leaning towards changing the existing bank surcharge rather than introducing a new windfall tax.
- Reversing the 2023 cut in the surcharge from 8 per cent to 3 per cent could raise around £2bn, although a partial increase is seen as possible.
- UK-focused banks such as Lloyds and NatWest fell sharply on Friday, while Barclays and HSBC, with large international operations, were less affected.
Senior banking executives have told the BBC they expect British banks to face higher taxes in the Budget later this month, a move that already weighed on bank shares on Friday. According to the executives, the sector is expected to be “on the menu” when Chancellor John Healey sets out his plans.
The reporting describes Healey as planning to increase taxes on the banking sector, even while he has called banks part of “the crown jewels” of the UK economy. That combination of praise and expected tax rises has put the sector at the centre of a debate about how the government should raise money and how much banks should contribute to public finances.
The scale of bank profits is central to that argument. According to the BBC, the biggest four UK banks collectively made about £15bn in profit in the first six months of this year. Trade unions have called for those firms to face additional taxes, arguing that the sector can afford to contribute more after a strong period of earnings.
The trade body for the banking sector, UK Finance, has pushed back. It 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.” That statement reflects a long-running concern in the industry: that higher taxes on banks can reduce the funds available for lending and investment, and may encourage firms to move activity elsewhere.
Market reaction was swift. Shares in banks including Lloyds and NatWest fell on Friday on expectations of tax increases, with both dropping more than 2 per cent and ranking among the biggest fallers on the UK stock market. Barclays fell only slightly, while HSBC rose. The difference is explained by the groups’ structures. Barclays and HSBC have large international operations, so a change to UK taxes would represent a smaller share of their overall profits. Lloyds and NatWest are more concentrated in the UK, which makes them more exposed to domestic tax changes.
To understand what could happen, it helps to know how banks are taxed in the UK. Banks pay corporation tax on their profits like other companies. On top of that, they have historically paid a bank surcharge, an extra levy on profits earned by the largest banking groups. They are also subject to the bank levy, a charge based on a bank’s balance sheet, meaning the amount of money it has borrowed and the loans and other liabilities it holds. The BBC describes the bank levy as a small percentage charged on loans.
The central option under discussion involves the surcharge. According to the BBC, one possibility is that Healey reverses a reduction in the surcharge on banks’ profits, cutting the rate from 8 per cent to 3 per cent. That reduction was introduced in 2023 by Jeremy Hunt, who was Conservative chancellor at the time. It coincided with an increase in the main rate of corporation tax from 19 per cent to 25 per cent. Critics argue the change was unfair because it lowered the surcharge at the same moment that the general tax rate on company profits rose, and some argue it should not have been cut at all.
The BBC understands that the Treasury is leaning towards changing the surcharge rather than the bank levy. The reason, according to the reporting, is practical: it is generally easier to change an existing tax rate than to introduce a new tax. A brand-new windfall tax, which is typically a one-off or temporary charge on profits seen as unusually high, would require designing a new mechanism, defining the base for the charge and deciding how it would apply, a process that can take longer and attract more scrutiny.
The revenue at stake could be significant but is not enormous compared with the overall size of the public finances. The BBC reports that reversing the 2023 surcharge rate would raise around £2bn. That figure would be a meaningful sum for a single measure, but how much would actually be collected depends on the final rate chosen and on how banks respond.
The reporting also points to a key limitation. The previous government was persuaded that adding an 8 per cent surcharge on top of the 25 per cent corporation tax rate would leave UK banks struggling to compete with European and US rivals. That concern suggests a middle path may be more likely than a full return to the earlier rate. In other words, the surcharge could be increased, but not all the way back to 8 per cent. Analysts who follow fiscal policy often describe this kind of calibration as a way to balance revenue needs against the risk of capital and activity moving to lower-tax jurisdictions.
Why does this matter beyond the banks themselves? Taxes on banks can affect ordinary households and businesses through several channels. If banks see their profits reduced, they may have less room to lower the cost of borrowing or to expand lending to small firms and homebuyers. They might also cut costs, which can affect jobs and investment. On the other side, supporters of higher bank taxes argue that the sector benefited from a period of strong profits and that public services and public finances should share in that success. The debate therefore touches on questions of growth, fairness and how the state funds its priorities.
The political framing is also important. UK Finance’s statement links bank taxation to the government’s stated ambition to deliver growth in every postcode. That phrase signals that the trade body sees its argument as one about regional economic opportunity, not only about the profitability of major banks. The government, for its part, has described banks as a critical part of the economy, which makes any tax increase a delicate political choice. A Budget that raises bank taxes must balance the message of support for a major economic sector against the need to raise revenue.
What happens next will depend on the Budget itself, which is due later this month. Investors will be watching whether the chancellor confirms a change to the surcharge, whether the bank levy is adjusted, and whether any new measures are introduced. The size of any increase, the timing and any transitional arrangements will shape how quickly banks respond. Share prices may continue to react to each new signal from the Treasury, especially for UK-focused lenders.
Another question is whether the policy will be presented as a permanent change or a targeted measure tied to current profit levels. The BBC’s reporting indicates that the Treasury prefers modifying an existing tax, which suggests a more gradual or structural adjustment rather than a sudden new levy. Analysts often watch for the wording of Budget documents to see whether a change is described as temporary or lasting, because that affects how banks plan their capital and their long-term investments.
For households and businesses, the immediate impact may be less direct than the headlines suggest. A tax increase on banks does not automatically translate into higher mortgage rates or loan charges, because lenders set prices using many factors, including funding costs, competition and risk. However, if banks conclude that their profits are structurally lower, they may adjust pricing or lending appetite over time. Those are the effects to watch as the policy takes shape.
In the short term, the key facts are clear. Banking executives expect higher taxes in the Budget later this month. Shares in UK-focused banks fell on Friday. The Treasury is reportedly leaning towards changing the surcharge, with reversing the 2023 cut to 3 per cent raising around £2bn if fully applied. The final outcome, including whether the rate returns partway or fully to 8 per cent, will be confirmed only when the chancellor sets out the Budget.
Topics: UK Budget, Banking, Bank tax, Corporation tax, Lloyds, NatWest, Barclays, HSBC, UK economy, Business
Sources: BBC Business RSS
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