Chancellor John Healey is reportedly considering raising the surcharge on bank profits above £100 million from 3% to 8% in the Budget, a move aimed at addressing the Government's spending challenges. The change would reverse a cut introduced in April 2023 under former Chancellor Jeremy Hunt.
Potential Revenue and Economic Impact
Major banks already pay a surcharge on profits in addition to Corporation Tax. Increasing the surcharge could raise approximately £2 billion for the exchequer, but banks warn it could inflict a £20 billion hit on the economy. When the surcharge was cut from 8% to 3% in 2023, Corporation Tax rose from 19% to 25%, lifting the combined rate on bank profits from 27% to 28%.
The Conservatives and City groups have cautioned that targeting banks would stifle investment and damage Britain's competitiveness as a financial centre. Damian Pudner, director of the Great British Think Tank, said higher taxes would influence how much banks invest and lend in the UK.
He said: "Borrowers, businesses and consumers will end up paying for this one way or another, whether through more expensive credit, reduced lending or weaker investment. The notion that the Government can extract billions more from banks without consequences for the wider economy is economically illiterate."
Political Reactions
Tory shadow chancellor Andrew Griffith said: "Britain needs growth. But a raid on the financial services sector will stifle it. Labour should be backing businesses and wealth-creators, not making their lives even harder."
Trades Union Congress (TUC) General Secretary Paul Nowak backed the move, which his union calculated would raise £2.25 billion per year. He said: "Britain's big four banks are making a billion pounds a week, while bonuses have hit a post-crash record. These are bumper profits – driven by high interest rates and households' mortgage misery... It's time to make sure banks pay their fair share."
A Treasury spokesperson said: "As has always been the case, decisions on tax are a matter for the Chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals."
Impact on Consumers
The City has warned that a tax raid on bank profits would push up mortgage rates and worsen the cost-of-living crisis. If banks are forced to pay more in tax, they could try to recoup losses by passing costs to customers, some of whom are already grappling with the cost-of-living.
Analysts at UBS have warned that banks would pass on the cost of increased taxes in higher mortgage rates and lower savings rates, though doing so risks losing customers to other lenders with better deals. If Mr Healey takes the idea forward, only the biggest banks would be affected, leaving customers with the option to switch to smaller rivals offering competitive rates.
UBS analyst Jason Napier warned that a tax raid would discourage investment and generate less revenue than needed to "move the needle" on UK public debt and spending, according to the Telegraph. Trade association UK Finance said a strong banking sector is essential to a strong UK economy, with a spokesperson warning that an increase in bank taxes in the Budget would weaken the UK's competitiveness, discourage investment and job creation.
