Will banks be able to escape a Reeves’ tax raid this Autumn?
As Rachel Reeves watches her fiscal headroom crumble with every Labour U-turn, the Chancellor may return to her budget mantra that those with the “broadest shoulders should bear the heavier burden”.
Lenders managed to skirt a tax raid in the 2024 budget after lobbyists warned it could damage the sector’s international competitiveness, but renewed fiscal pressure on Reeves and a political play by Angela Rayner could make banks a prime target for the next round of cash grabs.
Reeves’ fiscal stability has been gradually chipped away after a retreat on winter fuel payments and most recently a drastic climb-down on welfare reform.
The Labour government’s welfare bill targeted £5bn in savings but after backlash from 126 MPs, Prime Minister Sir Keir Starmer bent to the will of the rebels.
Though Starmer’s retreat comes with a cost, which the Institute for Fiscal Studies has warned could top £1.5bn for adjustments to personal independence payments (PIP) alone.
This fresh burden to the Chancellor’s waning £9.9bn headroom follows Reeves £190bn splurge in the Spending Review and Starmer’s £1.3bn winter fuel U-turn.
Oxford Economics said on Friday: “With every week that passes, tax rises at the autumn Budget look increasingly likely.”
The almost-certain return of hikes in the Autumn has renewed concerns banks will be forced to bear the burden of Reeves’ restoration of fiscal headroom after a leaked memo revealed the Deputy Prime Minister had proposed lenders were used to plug fiscal gaps.
Starmer’s second-in-command called for an annual £700m hike on the banking sector through changes to the surcharge.
UK Finance: Tax weighs on competitive edge
Banking industry body UK Finance lashed out against the proposals arguing the sector already makes a “significant contribution” to the UK’s tax base.
The industry’s total tax contribution for the 2023/24 financial year is estimated to be near £44.8bn, up 4.7 per cent from the year prior and the highest on record.
David Postings, chief executive of UK Finance, previously told City AM: “Banks based in the UK already pay a significantly higher rate of tax than those in New York and are expected to pay notably higher rates of tax than in other European capitals.”
British lenders are subject to an additional surcharge of three per cent, which sits on top of the standard 25 per cent in Corporation Tax. Rayner’s proposal extended the surcharge to five per cent, effectively slapping bank’s with a 30 per cent Corporation Tax.
The sector’s total rate, a staggering 45.8 per cent, dwarfs the more attractive tax policy in European rivals Amsterdam (42 per cent), Frankfurt (38.6 per cent) and Dublin (28.8 per cent).
Postings said: “The tax environment has an important bearing on investment decisions and growth. To make the UK’s approach to bank taxation globally competitive, we think the government should phase out the bank corporation tax surcharge and the bank levy over time.”
The industry enjoyed record profits as interest rates hit a post-financial crisis high in the last year.
The FTSE 100 Big Five banks – Barclays, HSBC, Natwest, Lloyds and Standard Chartered – booked an all-time high of £50.3bn in profit in 2024 and returned £35bn to investors.