Chancellor Prepares to Announce Bank Tax Hike Amid Profit Row

Chancellor John Healey is expected to significantly increase the bank surcharge in his upcoming Budget, potentially raising it from 3% to 8%. This move, anticipated just hours after HSBC reported a 32% jump in third-quarter profits to £7.2 billion, has ignited a debate over windfall taxes.

The Trade Union Congress (TUC) has advocated for a more aggressive increase, suggesting a 35% windfall tax could generate £15 billion annually, accumulating to £60 billion over four years. TUC general secretary Paul Nowak argued that HSBC's robust profits demonstrate the banking sector's capacity to contribute more, particularly to offset rising household energy costs.

However, opposition voices, including Shadow Chancellor Andrew Griffith, have cautioned that higher taxes could increase the cost of credit for businesses and mortgage holders, while diminishing the competitiveness of London's financial services sector on the global stage. HSBC, Britain's largest bank, reported that while less than a fifth of its profits originated from UK operations, this still amounted to £1.4 billion. The bank also announced a £750 million share buyback.

The surge in profits, following similar reports from Barclays, has amplified calls for increased taxation on the industry. Despite the profit news, HSBC shares experienced a more than 5% decline on Tuesday, leading the bank to lose its status as the FTSE 100's most valuable company to Shell. Bank stocks have seen a downturn recently amid mounting speculation about potential windfall taxes.

Banks in the UK already face a higher effective tax rate than their counterparts in other major financial centers. The current bank surcharge is levied in addition to the standard corporation tax. In 2023, the surcharge was reduced from 8% to 3% by the Conservative government as corporation tax was simultaneously increased from 19% to 25%.

If the surcharge is indeed raised, HSBC may be less impacted than domestic lenders like Lloyds and NatWest due to its significant international earnings. Nowak further contended that banks' soaring profits and executive bonuses stand in stark contrast to the struggles faced by the general public, asserting that a tax on banks is a justifiable measure to help reduce consumer bills.

Pam Kaur, HSBC's finance chief, has dismissed suggestions that the bank would relocate its headquarters from London. Meanwhile, Julian Jessop, an economics fellow at the Institute of Economic Affairs, characterized the calls for a windfall tax as "predictable and misguided." He argued that such a tax would negatively affect shareholders, including pension fund investors, and could lead to increased customer charges, reduced wages, job cuts, and a decrease in investment or outward migration of banking activities.

UK Finance has warned that additional taxation would further isolate the UK in the international financial landscape. The industry body pointed out that UK banks, when accounting for employment levies and VAT, face an effective tax rate of 46.5%, compared to 39.1% in Frankfurt and 27.9% in New York.