Banks say Healey is planning Budget tax raid on their profits

Senior banking executives have informed the BBC that the financial sector is likely to be a focus during the chancellor’s Budget announcement in two weeks.

John Healey characterized banks as part of the UK's "crown jewels" yet has not dismissed the possibility of imposing additional taxes on the sector.

In the first half of this year, the four largest banks reported collective profits of approximately £15 billion, prompting calls for increased taxation from trade unions and other stakeholders.

Conversely, UK Finance, the banking sector's trade body, cautioned that "further increases in bank taxes would undermine competitiveness, deter investment and job creation, and counter the government's goal of fostering growth across all regions."

Current Tax Structure

The largest banks and building societies in the UK currently incur a surcharge of 3% on top of the standard 25% corporation tax rate, along with a levy imposed on the assets maintained on their balance sheets.

Last year, the sector contributed nearly £40 billion to the Treasury, accounting for income tax on employees.

The bank levy alone generated £1.4 billion, while the surcharge added another £1.2 billion to that total.

Potential Tax Options

Several avenues exist through which the chancellor could enhance revenue from the banking industry.

One option would be reverting the 3% surcharge, previously 8% under Rishi Sunak, alongside the increment in corporation tax from 19% to 25%. This return to the prior surcharge level could potentially generate around £2 billion annually.

Currently, the bank levy charges 0.1% on short-term loans and 0.05% on longer-term loans, with mortgages excluded from this calculation.

Historically, banks have successfully contended that increasing taxes might jeopardize the UK's competitiveness in the global market and limit their lending ability, thereby being counterproductive to growth.

In fact, banks expressed surprise at not facing increased taxation during the last Budget, given their substantial profits in recent years. Rising interest rates have widened the gap between borrowing costs and the interest paid to savers.

Loss Offset Moratorium

Another option under consideration involves the utilization of past losses as offsets against current profits, effectively lowering tax liabilities. Lloyds, in particular, has benefited significantly from this approach, utilizing substantial losses from the financial crisis to diminish its tax expenses.

Some analysts and bank executives have proposed implementing a temporary moratorium on this practice for a few years, which could yield an estimated £1 billion annually for the Treasury. This approach would provide immediate financial benefits while being deemed "much more manageable," according to one banking executive.

Moreover, it would shield foreign banks, including JP Morgan, whose CEO Jamie Dimon has highlighted that the UK's bank tax obligations are among the highest globally. He cautioned that introducing additional sector-specific taxes could deter investment and diminish competitiveness.

Nonetheless, industry leaders assert that any tax increases impacting UK banks while exempting foreign operations would be difficult to justify, particularly in light of the government's commitment to support British enterprises.

Regardless of the eventual outcome, banks perceive a growing likelihood that the chancellor will seek a more significant share of their profits.