UK Banks Expect Possible Higher Taxes in Upcoming Budget

What changed

UK banks expect the government to consider higher sector-specific taxes in the Budget due in two weeks.

The four biggest banks made around £15bn collectively in the first six months of this year. They already pay a 25% corporation-tax rate, a 3% surcharge and a balance-sheet levy.

Why it matters

The chancellor has several ways to take more money from the sector:

• Restore the bank surcharge to its former 8% rate, raising an estimated £2bn a year.
• Temporarily restrict banks’ use of historic losses to reduce current tax bills, raising an estimated £1bn annually.
• Increase the existing bank levy, which brought in £1.4bn last year. The surcharge raised another £1.2bn.

This is a choice between a visible windfall and a longer argument about Britain’s appeal as a place to build a bank. UK Finance says higher taxes could weaken competitiveness, investment and job creation. Jamie Dimon has also warned that the UK already places one of the world’s heavier tax burdens on banks.

The government faces an awkward balance. Banks contributed nearly £40bn to the Treasury last year when employees’ income tax is included, but their recent profits have been helped by the wider gap between lending rates and savings rates. Mortgages are excluded from the bank-levy calculation, so changing that levy would not simply amount to taxing every part of household banking.

My reading is that limiting the use of old losses may be the politically easier route. It could raise money without immediately increasing the headline tax rate, and one bank executive described it as more bearable. But the final measure is unknown, and the Budget may contain no banking-tax increase at all. Any policy that affects UK banks while exempting foreign banks operating in Britain would also sit uneasily with the government’s stated support for British business.