Chancellor Eyes £7 Billion Windfall Tax on Banks Amid Record Profits

UK banks are poised to report exceptionally high profits, fueled by sustained higher interest rates, even as Chancellor John Healey reportedly considers a substantial windfall tax. The Chancellor is expected to target banks in his upcoming budget, a move that lenders largely anticipate following their exclusion from previous tax measures.

The four largest banks – Lloyds, NatWest, Barclays, and HSBC – collectively reported pre-tax profits of £29 billion in the first half of 2026, marking a more than 20 percent increase compared to the same period in the previous year. Barclays is scheduled to release its nine-month financial results this Thursday, with Lloyds to follow a day after the October 28 Budget.

These increased profits are attributed to higher interest rates, which allow banks to widen the margin between the rates offered to savers and charged to borrowers. Additionally, banks benefit from approximately £18 billion annually earned on reserves held risk-free at the Bank of England through quantitative easing, a program initiated in 2009.Economists suggest that commercial banks are realizing significant profits by not fully passing on higher interest rates to savers.

Banks are viewed as a politically accessible target for tax increases, partly due to taxpayer-funded bailouts during the 2008-2009 financial crisis. However, industry leaders have cautioned that such tax hikes could reduce lending to businesses and homeowners, potentially hindering economic growth.

One proposed method for Healey to increase taxes on banks would be to reinstate the bank profit surcharge to 8 percent, from its current 3 percent level. This adjustment, initially reduced by former Chancellor Jeremy Hunt to offset a rise in corporation tax, could generate approximately £2 billion. The UK Finance trade body has warned that such a move could result in a £20 billion loss to the economy over a decade, impacting lending and investment crucial for economic revitalization across the UK.

Another potential fiscal measure involves altering the accounting for losses the Treasury incurs on commercial lenders' quantitative easing reserves. According to the Institute for Public Policy Research, adjusting these accounting practices could save the Treasury at least £5 billion annually by the end of the decade. This approach would avoid directly impacting banks' profitability or the Bank of England's monetary policy.

Combining an increased surcharge with accounting adjustments could yield approximately £7 billion annually, significantly aiding Healey in meeting his fiscal objectives. The Chancellor's fiscal headroom, a buffer for balancing the budget, has been reduced by half due to increased government borrowing costs. The Treasury has declined to comment on these reports.