Chancellor John Healey is expected to propose an increase to the bank surcharge in an upcoming budget, a move that has ignited debate between unions advocating for higher taxes on financial institutions and industry groups warning of economic repercussions. The potential hike follows a period of substantial profits reported by major banks, including HSBC.
The proposed increase could see the bank surcharge rise from its current 3 percent to as high as 8 percent. Unions, such as the TUC, have lauded the prospect, with TUC general secretary Paul Nowak stating that the recent profits reported by banks like HSBC demonstrate their capacity to contribute more. The TUC claims that an 8 percent surcharge could generate over £2 billion annually, and a steeper 35 percent levy could yield as much as £15 billion per year, amounting to a £60 billion windfall over four years.
However, the proposal has drawn criticism from opposition figures and industry representatives. Shadow Chancellor Andrew Griffith has voiced concerns that higher taxes would increase the cost of credit for businesses and mortgage holders, potentially diminishing the competitiveness of London's financial sector on the global stage.
This debate unfolds as HSBC, Britain's largest bank, reported a 32 percent increase in third-quarter profits, reaching £7.2 billion. While less than a fifth of these profits originated from its UK operations, this still amounted to £1.4 billion. The bank also announced a £750 million share buyback. These results, coupled with strong profits from other institutions like Barclays, have intensified calls for windfall taxes.
Despite the profit figures, HSBC shares saw a decline of over 5 percent following the announcement, causing the bank to lose its position as the most valuable company in the FTSE 100 to oil giant Shell. Bank shares have reportedly been affected by the growing speculation surrounding potential windfall taxes.
Currently, banks in the UK operate under a higher tax regime compared to other financial centers such as New York. The existing bank surcharge is levied in addition to the main corporation tax rate. The surcharge was reduced by the Conservative party from 8 percent to 3 percent in 2023, concurrent with an increase in the main corporation tax rate from 19 percent to 25 percent.
HSBC's global operations mean it may be less impacted by a higher bank levy than domestic lenders like Lloyds and NatWest. Pam Kaur, HSBC's finance chief, has dismissed suggestions that the bank is considering relocating its headquarters from London.
Economists like Julian Jessop, an economics fellow at the Institute of Economic Affairs, have described the calls for windfall taxes as "predictable and misguided." He argues that such taxes could negatively impact shareholders, pension fund investors, savers through higher bank charges, and employees via potential wage stagnation or job cuts. He also warned of the risk that banks might reduce investment or shift activities overseas.
UK Finance has cautioned that additional taxes would further isolate the UK's banking sector internationally. The association notes that UK banks, when considering employment levies and VAT, face a total tax rate of 46.5 percent, compared to approximately 39.1 percent in Frankfurt and 27.9 percent in New York.