UK banks brace for possible tax rise in first Labour budget

Treasury likely to seek to raise an existing surcharge that banks already pay

By Reuters

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A drone view of the Shard skyscraper with the Canary Wharf financial district in the background in London. — Reuters file

Published: Wed 4 Sep 2024, 5:08 PM

Last updated: Wed 4 Sep 2024, 5:09 PM

Banks in Britain are intensifying their lobbying against possible tax hikes in the new Labour government’s first budget next month, amid concerns it may tap the sector to boost public finances, senior industry sources told Reuters.

Neither Prime Minister Keir Starmer nor Finance Minister Rachel Reeves has said banks will have to pay higher taxes, but Starmer’s recent reference to the burden falling on those with “broader shoulders” has fuelled concerns, three sources said.

Banks have enjoyed bumper profits in recent years on the back of higher interest rates.

Reeves is due to meet senior sector representatives in the coming days, when bankers expect a rise in taxes on bank profits will be discussed, two of the sources said.

A spokesperson for the Treasury said it would not comment on “speculation about tax changes outside of a fiscal event”.

The sources, who declined to be named because of the sensitivity of the matter, said they anticipate the Treasury will seek to raise an existing surcharge that banks already pay.

This was the simplest way Reeves could tap the sector to help fill a 22 billion pound ($28.8 billion) hole in public finances in her Oct. 30 budget, the sources said.

This would be easier than cutting the amount of interest UK banks earn on reserves parked at the Bank of England, which could distort the effects of its monetary policy, they added.

HSBC, Britain’s largest bank, posted a 78 per cent rise in 2023 pretax profit to $30.3 billion pounds in February and competitors including NatWest Group and Barclays have recorded similarly robust returns.

British bank shares dipped briefly last week after the Financial Times quoted an unnamed former government official making the case for a “sensibly crafted” levy on banks.

The bank levy was introduced in 2011 to curb excessive risk and reckless growth following the global financial crisis.

While the sector has since stockpiled billions of pounds in capital against its activities, no UK government has made a serious attempt to phase out the revenue-raising tool.

A spokesperson for UK Finance, which represents UK banks, told Reuters it was aware of the rising concern.

The trade body is poised to reiterate calls for the banks levy and corporation tax surcharge to be phased out altogether in its pre-budget submission to the Treasury, which is accepting feedback until Sept. 10, the spokesperson said.

“Banks based in the UK pay a significantly higher rate of tax than those in New York. And our analysis shows that they are expected to pay notably higher rates of tax in future years than in other European capitals,” UK Finance said.

Simon Youel, Head of Policy and Advocacy at campaign group Positive Money, told Reuters that any increase to the banking surcharge or bank levy should not be viewed as tax hikes, “but rather a reversal of tax cuts given to banks under the Conservative government”.

Starmer and Reeves host Britain’s annual investment summit next month, where they hope to persuade international investors representing billions of pounds of capital to bankroll their plans to revive the country’s lacklustre economic growth.

“All of the legislation that happened last year was designed to create a more competitive environment and was all supported by Labour,” one of the sources said.

“The industry would be confused and disappointed if something like this went ahead. The banks are certainly not just resigned to something like this.”