Britain's largest banks are anticipating a potential windfall tax on their significant profits as the new Chancellor, John Healey, explores avenues to improve the nation's fiscal standing. This prospect comes as Lloyds, NatWest, and Barclays are set to release financial results this week, which are expected to highlight nearly £19 billion in combined profits for the year, an increase from approximately £16 billion in 2025.
The banks have benefited from sustained higher interest rates, which have expanded their net interest margins – the difference between the interest paid to savers and charged to borrowers. These strong profits have already prompted calls from various political factions for an additional levy on the sector.
Industry analysts suggest a windfall tax is highly probable. "I would have thought that the likelihood of a bank tax was about 95 per cent probable," stated Ed Firth of investment bank KBW. "Banks are making way in excess of their cost of equity and returning huge amounts of capital to shareholders."
Bank executives have voiced concerns that a windfall tax could lead to reduced lending and hinder economic growth. Jamie Dimon, CEO of JP Morgan, recently advised Prime Minister Andy Burnham against increasing taxes on banks, cautioning that it could jeopardize plans for a new £3 billion headquarters in London and deter investment.
Experts believe the most likely mechanism for increased taxation would be the bank surcharge. This levy is currently set at 3% above the 25% corporation tax rate for banks earning over £100 million annually. The Trades Union Congress estimates that reversing the 2023 reduction of this surcharge from 8% could generate £9 billion over four years.
Chancellor Healey is reportedly considering this and other measures to fund increased spending on welfare, defense, and cost-of-living support, while adhering to fiscal rules limiting public borrowing. Another potential option is to adjust the 'reserve tiering' scheme, a subsidy paid to High Street banks that is estimated to cost taxpayers £20 billion annually. Under this scheme, banks receive interest on reserves held at the Bank of England, which have grown significantly due to quantitative easing programs initiated after the 2008 financial crisis. With the Bank of England base rate rising, banks now earn substantial interest on these reserves.
"I wouldn’t rule out reserve tiering," said John Cronin, founder of banking consultancy SeaPoint Insights. "I just think the surcharge is the easier change."
Previous Chancellor Rachel Reeves had resisted calls for a windfall tax amid significant lobbying from the banking sector. The trade body UK Finance has argued that a new banking tax would negatively impact Britain's international competitiveness and impede the government's growth objectives. According to PwC, banks paid a total of £43 billion in taxes last year.