Chancellor Healey Considers Taxing Banks Amid Profit Surge

Banks are anticipating substantial profit reports, coinciding with Chancellor John Healey's consideration of a significant windfall tax to address public finances. Lenders reportedly expect to be a target in Healey's upcoming Budget, following their omission from such measures by his predecessor, Rachel Reeves.

The "big four" 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 2025. Barclays is scheduled to release its nine-month profits soon, with Lloyds set to report a day after the Budget on October 28.

These profit increases are attributed to sustained higher interest rates, which enable banks to widen the margin between borrowing costs and savings rates. Additionally, banks earn approximately £18 billion annually from reserves held risk-free at the Bank of England, a benefit stemming from the quantitative easing program initiated in 2009. "Commercial banks are making very high profits by not passing on high rates to savers," noted Carsten Jung, a senior economist at the Institute for Public Policy Research.

Healey recently described banks as a "jewel in the British economic crown," a statement made shortly before reports emerged of a potential windfall tax. Banks are considered a politically accessible target, particularly given the taxpayer-funded bailouts they received during the 2008-09 financial crisis.

However, banking industry representatives have cautioned that increased taxation could reduce lending to businesses and homeowners, potentially hindering economic growth. A proposed method for Healey to increase taxes on banks involves reinstating a previously reduced surcharge on their profits. Restoring this surcharge from its current 3 percent to 8 percent, as established in 2015, could generate around £2 billion.

UK Finance, a trade body, has warned that such a tax adjustment could lead to a loss of nearly £20 billion in economic output over a decade, with most of this impact occurring outside of London. "These findings illustrate how a near-term increase in tax revenue could come at the expense of the lending and investment needed to re-industrialise the economy and drive growth across the UK," stated chief executive David Postings.

Banks have been subject to a tax based on their balance sheet size since 2011, a measure implemented as a consequence of their past bailouts.

Potential Revenue Streams

Another avenue for Healey to raise revenue could involve altering the accounting of losses the Treasury is currently incurring on commercial lenders' quantitative easing reserves. According to the IPPR, adjusting how these losses are accounted for could save the Treasury at least £5 billion annually by the end of the decade. This approach would reportedly not affect banks' profitability or the Bank of England's monetary policy. Combining this with the £2 billion from the surcharge increase could yield a total of £7 billion annually, significantly aiding Healey in meeting his fiscal objectives.

The Chancellor's fiscal headroom, the buffer available to balance the books, has been reduced by half due to increased government borrowing costs. The Treasury has declined to comment on these developments.