UK banks are bracing for higher taxes when Chancellor Rachel Reeves presents the Budget in two weeks, according to senior banking executives who told the BBC the sector expects to be "on the menu."
The four largest banks generated around £15bn in profit during the first half of 2024, prompting calls from trade unions for additional taxation. John Healey has described banks as "crown jewels" of the UK economy yet has not ruled out targeting the sector.
The sector already carries substantial tax burdens. Banks pay a 3% surcharge on top of the baseline 25% corporation tax rate, plus a separate levy on balance sheet assets. Collectively, banks contributed nearly £40bn to the Treasury last year when employee income tax is included. The bank levy alone generated £1.4bn in 2023, with the surcharge adding a further £1.2bn.
The chancellor has several options to extract additional revenue. The 3% surcharge was reduced from 8% under previous chancellor Rishi Sunak, who simultaneously raised corporation tax from 19% to 25%. Restoring the surcharge to 8% could raise approximately £2bn annually. Alternatively, the bank levy, which currently charges 0.1% on short-term loans and 0.05% on longer-dated loans (excluding mortgages), could be increased.
A third option involves restricting banks' ability to offset historical losses against current profits. Lloyds has particularly benefited from this policy, using losses from the 2008 financial crisis to reduce tax bills for years. A temporary moratorium on this practice could yield an estimated £1bn per year for the Treasury. One bank executive described this approach as "a lot more bearable" than broader tax increases.
UK Finance, the banking sector's trade body, warned that further tax increases would "weaken competitiveness, discourage investment and job creation, and work against the government's ambition to deliver growth in every postcode."
Foreign bank executives, including JP Morgan chief Jamie Dimon, have cautioned that the UK already imposes one of the world's highest tax burdens on banks. Dimon warned that additional sector-specific taxes could deter investment. However, industry leaders note that taxing UK banks while exempting foreign competitors' UK operations would contradict the government's stated commitment to backing British business.
Banks were largely spared at the last Budget despite substantial recent profits, which expanded following rising interest rates that widened lending margins.