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Rachel Reeves should be wary of hobbling Britain’s sluggish economy with a Budget tax raid on banks, the City of London has warned, ahead of a meeting with the nation’s top financiers in Downing Street on Thursday.
The chancellor and Bank of England governor Andrew Bailey will hold talks with the bosses of leading lenders, which have just enjoyed a year of record profits boosted in part by higher interest rates.
The industry fears that Reeves may squeeze the sector after a year where profits at the six biggest British lenders — Barclays, Lloyds Banking Group, HSBC, NatWest, Nationwide and Santander — surged 39 per cent to a new all-time high of £48bn.
One senior banker said that the City offers a “tempting target” to the chancellor as she seeks to repair the nation’s public finances.
Prime Minister Sir Keir Starmer on Wednesday declined to rule out higher taxes on banks in next month’s Budget.
Officials close to the Treasury’s Budget preparations say higher bank taxes are one of a full range of options on the table.
Banks are already making their case against a tax rise.
“The banking sector is a major contributor to the UK’s tax base, and supports a large number of skilled jobs while delivering growth and investment up and down the country,” UK Finance, the main lobby group for British banks, said on Wednesday.
“Banks’ profits allow them to invest in their businesses for the benefit of customers and deliver shareholders, including pension funds, a return on their investment,” it said, adding that this “should be considered in terms of taxes on banks in the UK”.
The Treasury declined to comment on what it called “Budget speculation”.
Thursday’s meeting is primarily to discuss new capital rules for the sector: the Bank of England is expected to announce it is delaying the start date for tougher capital rules from the middle of next year until at least the start of 2026.
But banks and Treasury insiders say the issue of how to boost growth — particularly ahead of an investment summit in London next month — is also likely to come up in the talks.
Bank executives are likely to point to recent calculations by PwC for UK Finance showing the total tax rate for a typical British lender this year was 45.8 per cent, well above the equivalent 27.9 per cent for a New York-based rival or 38.6 per cent for one based in Frankfurt.
Reeves needs the banks to help deliver her growth agenda. The scale of her challenge was underlined by data released on Wednesday showing the UK economy unexpectedly stagnated for a second consecutive month in July.
She is facing political pressure, after Sir Ed Davey, Liberal Democrat leader, on Wednesday called on Starmer to reverse Conservative cuts to the bank levy and the bank corporation tax surcharge. Lib Dems claim that could raise £3.5bn.
“I’ll resist the temptation to get ahead of the Budget,” Starmer said in response.
Jeremy Hunt, former chancellor, cut the bank corporation tax surcharge from 8 per cent to 3 per cent in April 2023, at the same time as he raised the general rate of corporation tax from 19 per cent to 25 per cent.
Reeves has said she wants to “fix the foundations” of the economy, suggesting she will be looking for tax rises to repair the public finances in the years to come. That would imply a more lasting change to tax rates than the one-off levy feared by some in the sector.
Hunt, now shadow chancellor, said hiking taxes on the banks would backfire. “It would be the most counter-productive own goal in history for a chancellor to hit the golden goose in the way some are speculating,” he said.
Before the election Reeves was adamant she had no plans to increase taxes on banks, but since polling day she claims to have unearthed a £22bn fiscal hole, a claim strongly denied by Hunt.
“There’s no need to have a tax on banks,” she told the FT in June, before the election. “I don’t believe that doing that would help us achieve what we want to achieve, which is growing the economy.”
But one senior banker admitted that in the wake of the row over Reeves’s decision to cut winter fuel payments to pensioners, higher bank taxes would be politically attractive.
“It’s possible they will do it,” the banker said. “The banks do present a tempting target.”
The fear shared by bankers and many bosses across the economy is that Reeves has boxed herself in by ruling out tax rises in the biggest Treasury revenue raisers: income tax, value added tax, employee national insurance and corporation tax.
She is therefore confronted with a range of tax-raising options which could hamper her “growth mission”, including increasing capital gains tax, higher bank taxes or employer NICs, alongside her stated plan to put up taxes for non-doms and private equity executives.
