Banks say Healey planning to increase tax on their profits in Budget

By Simon Jack, Business editor

Senior executives within the banking sector have conveyed to the BBC their expectation that the industry will be a focal point in the upcoming Budget announcement by Chancellor John Healey, scheduled for two weeks from now.

Chancellor Healey has characterized banks as "the crown jewels" of the UK economy, yet he has not dismissed the possibility of increasing taxes on this vital sector.

The four largest banks reported approximately £15 billion in profits during the first half of this year, igniting calls for higher taxes from trade unions and various stakeholders.

In contrast, the banking industry's representative body, UK Finance, cautioned 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."

Current tax structure

Presently, the largest banks and building societies in the UK are subject to a surcharge of 3% atop the standard 25% corporation tax rate, in addition to a levy on their balance sheet assets.

The sector contributed nearly £40 billion to the Treasury last year, taking into account income tax generated from employees.

The bank levy alone produced £1.4 billion, while the surcharge accounted for an additional £1.2 billion.

Possible tax increases

There are multiple strategies through which the Chancellor could raise additional revenue from the banking sector.

The 3% surcharge was previously reduced from 8% under Rishi Sunak, who simultaneously increased the corporation tax from 19% to 25%. Restoring the surcharge to its former rate could potentially generate around £2 billion annually.

Currently, the bank levy is applied at a rate of 0.1% on outstanding short-term loans and 0.05% on loans with longer maturities, excluding mortgages from these calculations.

Banking institutions have historically argued that elevated tax rates would jeopardize the UK's competitive standing relative to other jurisdictions and limit their capacity to lend, which in turn counteracts growth.

In reality, the banks were relieved that they were not adversely affected in the last Budget, considering the significant profits they have been generating in recent years. Rising interest rates have widened the gap between lending rates for customers and the interest banks pay to savers.

Alternative approach

An alternative strategy under consideration involves the ability of banks to apply past losses against current profits, thereby mitigating tax liabilities in the present fiscal year. Lloyds, in particular, has capitalized on this arrangement, utilizing large financial crisis-era losses to reduce its tax bills consistently.

Some analysts and bank executives have proposed instituting a temporary moratorium on this tax mitigation practice, which could result in an estimated additional £1 billion per year for the Treasury. This measure could deliver a financial boon while being "a lot more bearable," according to one bank executive.

Moreover, this approach would protect foreign banking entities from an additional financial burden, including firms like JP Morgan, whose CEO Jamie Dimon has previously asserted that the UK already possesses one of the most significant tax burdens on banks globally. He highlighted that imposing further sector-specific taxes could deter investment and undermine competitiveness.

Nevertheless, industry leaders caution that any tax increases that predominantly affect UK banks while exempting foreign banks' UK operations would be challenging to reconcile with the government's objective of supporting British businesses.

Regardless of the specific structure, banks perceive a growing willingness from the Chancellor to claim a larger share of their profits.