UK Banks Face Possible Budget Tax Rise

UK Chancellor John Healey is reportedly considering higher taxes on banks in the upcoming Budget, as lenders face pressure to contribute more after recording substantial profits.

Banks warn against higher taxes

Senior banking executives have told the BBC that the sector could face additional taxation in the Budget, expected in two weeks. The UK’s four largest banks collectively made about £15 billion in profit during the first half of the year.

However, UK Finance, the banking industry’s trade body, warned that further tax increases could weaken competitiveness, discourage investment and reduce job creation, potentially undermining the government’s economic growth ambitions.

How banks are currently taxed

Major UK banks and building societies pay the standard 25% corporation tax rate, alongside an additional 3% surcharge on profits. They also pay a levy based on assets held on their balance sheets.

The surcharge was reduced from 8% under former chancellor Rishi Sunak when corporation tax increased from 19% to 25%. Restoring the surcharge to its previous level could raise approximately £2 billion annually.

The bank levy generated £1.4 billion for the Treasury last year, while the surcharge contributed another £1.2 billion. The banking sector’s overall contribution reached nearly £40 billion when employees’ income tax payments were included.

Calls for banks to contribute more

Sir Philip Augar, a former banker and author, said there was room for a moderate tax increase that could generate up to £3 billion annually.

He argued that banks were benefiting from favourable economic conditions and higher interest rates, which have widened the difference between lending rates and the interest paid to savers.

Paul Nowak, general secretary of the Trades Union Congress, said most bank employees were ordinary workers rather than wealthy financial executives. However, he supported asking banks to contribute a fairer share of tax.

Alternative proposal could raise £1bn

Another option under discussion involves temporarily restricting banks from using losses accumulated in previous years to reduce their taxable profits. Lloyds Banking Group has benefited from this arrangement following substantial losses during the financial crisis.

A temporary suspension could raise an estimated £1 billion annually for the Treasury while limiting the immediate impact on banks.

However, industry leaders have warned that additional taxes could discourage investment. JPMorgan chief executive Jamie Dimon has also argued that the UK’s existing tax burden on banks is already high by international standards.

Banking executives further caution that targeting British lenders while leaving foreign banks’ UK operations less affected could conflict with the government’s commitment to supporting domestic businesses.