UK Chancellor John Healey is preparing to increase taxation on banks ahead of his Budget announcement in two weeks, according to senior banking executives who told the BBC they expect the sector to face a tax rise.
Healey has refused to rule out additional taxes on banks, despite describing them as part of "the crown jewels" of the UK economy. The four largest banks collectively earned around £15bn profit in the first half of this year, prompting calls from trade unions for higher levies.
Banks currently face a 3% surcharge on top of a baseline 25% corporation tax rate, plus a levy on balance sheet assets. The sector contributed nearly £40bn to the Treasury last year when employee income tax is included. The bank levy generated £1.4bn last year and the surcharge a further £1.2bn.
The Treasury has multiple options for extracting additional revenue. The 3% surcharge was reduced from 8% under former chancellor Rishi Sunak, who simultaneously raised corporation tax from 19% to 25%. Restoring the surcharge to 8% could raise around £2bn annually. Alternatively, the chancellor could increase the bank levy, which currently charges 0.1% on short-term loans and 0.05% on longer-dated loans. Mortgages are excluded from the calculation.
A third option under discussion with Treasury officials involves restricting banks' ability to use past losses to offset current profits. Lloyds has particularly benefited from this practice, using losses from the financial crisis to reduce tax bills for years. A moratorium on this relief for several years could yield an estimated £1bn annually.
One bank executive described a loss offset moratorium as "a lot more bearable" than direct tax increases. However, industry leaders warn that any measure targeting UK banks while exempting foreign banks operating in the UK would contradict the government's stated commitment to backing British business.
UK Finance, the banking sector trade body, warned 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". Jamie Dimon, chief executive of JP Morgan, has stated that the UK already has one of the highest tax burdens on banks globally and that additional sector-specific taxes could discourage investment.
Banks expressed surprise at avoiding tax increases in the previous Budget despite rising profits from interest rate margins expanding the gap between lending rates and rates paid to savers.