UK Banks Brace for Potential Tax Increase in Upcoming Budget

Senior banking executives have indicated that the financial sector is likely to be a focus for tax changes in the upcoming Budget, according to the BBC. Shadow Chancellor John Healey has referred to banks as vital to the UK's economy, but has not ruled out increasing taxes on the sector.

The UK's largest banks reported substantial profits in the first half of the year, collectively earning approximately £15 billion. This has led to calls from various groups, including trade unions, for additional taxation.

However, UK Finance, the banking industry's trade body, has cautioned that further tax increases could negatively impact the sector's competitiveness, discourage investment and job creation, and hinder the government's growth objectives.

Currently, major British banks and building societies are subject to a 3% surcharge on top of the standard 25% corporation tax rate, in addition to a levy on their balance sheet assets. Last year, the banking sector contributed nearly £40 billion to the Treasury, when employee income tax is included. The bank levy generated £1.4 billion and the surcharge an additional £1.2 billion in the same period.

Several potential avenues exist for the chancellor to increase revenue from the sector. The 3% surcharge was previously 8% before being reduced under Rishi Sunak when he served as chancellor. Reinstating this higher rate could potentially generate around £2 billion annually. The bank levy currently applies at rates of 0.1% on short-term loans and 0.05% on longer-dated loans, excluding mortgages.

Industry insiders suggest that banks were somewhat surprised not to face additional taxes in the previous Budget, given their recent profitability, which has been boosted by rising interest rates widening lending margins. One proposed alternative discussed with Treasury officials involves a moratorium on banks using historical losses to offset current profits, a practice that has reduced tax liabilities for some institutions, such as Lloyds, for years. This measure alone is estimated to yield an additional £1 billion per year for the Treasury and could be viewed as a more palatable option.

This approach could also potentially exempt foreign banks operating in the UK from further tax burdens. However, industry leaders have noted that any tax measure that targets domestic banks while excluding foreign operations would be difficult to reconcile with the government's stated commitment to supporting British businesses.

Despite potential industry objections, banking executives believe there is now a greater inclination within the government to increase the sector's tax contributions.