John Healey has not ruled out imposing additional taxes on banks when he announces the Budget in two weeks, senior banking executives told the BBC.
The UK's biggest four banks made around £15bn profit in the first six months of 2024, prompting calls from trade unions for higher taxes on the sector. Healey has called banks part of "the crown jewels" of the UK economy but has kept the door open to a tax increase.
The sector currently pays a 3% surcharge on top of the baseline 25% corporation tax rate, plus a levy on balance sheet assets. Banks and building societies contributed nearly £40bn to the Treasury last year when employee income tax is included. The bank levy alone generated £1.4bn and the surcharge £1.2bn in the previous financial year.
UK Finance, the banking sector trade body, warned that further tax increases would "weaken competitiveness, discourage investment and job creation, and work against the government's ambition to deliver growth in every postcode".
The chancellor has several options available. The 3% surcharge was cut from 8% under Rishi Sunak when corporation tax rose from 19% to 25%. Restoring the surcharge to 8% could raise around £2bn annually. The bank levy could be increased from its current rate of 0.1% on short-term loans and 0.05% on longer-dated loans, though mortgages remain excluded.
One alternative discussed with Treasury officials involves restricting banks' ability to use past losses to offset current profits. Banks like Lloyds have benefited significantly from this policy by offsetting losses from the 2008 financial crisis against subsequent tax bills. A moratorium on this practice for several years could generate an estimated £1bn annually for the Treasury. One bank executive described this option as "a lot more bearable" than other proposals.
JP Morgan chief executive Jamie Dimon has warned that the UK already imposes one of the world's highest tax burdens on banks and that further sector-specific taxes could discourage investment. Industry leaders argue that any tax rises hitting UK banks while exempting foreign banks' UK operations would contradict the government's stated commitment to back British business.
Banks were pleasantly surprised at the last Budget when they were not taxed further, given recent profit growth driven by higher interest rate margins between lending and savings rates. Whatever form any new taxes take, banking leaders believe Healey now has greater appetite for taking a larger share of their profits.