UK banks have a familiar feeling this autumn: the Treasury’s sights are once again trained on their profits. After a run of record-breaking earnings and shareholder payouts, Chancellor Rachel Reeves is eyeing the sector as a convenient source of cash to fill her fiscal hole — without breaching Labour’s “no new taxes on working people” pledge.
The logic is tempting. Britain’s “big five” banks — Lloyds, NatWest, Barclays, HSBC and Standard Chartered — are expected to haul in around £53 billion in profits this year. Rising interest rates have widened margins and boosted returns. Political sympathy for the industry remains scarce, even 15 years after the financial crisis. Few voters will object to a little fiscal redistribution from banks to the Exchequer.
The question is how — and how hard — the Chancellor chooses to squeeze. Two levers sit within reach. The first is the banking surcharge, an extra tax on profits that currently sits at 3 per cent, down from 8 per cent before 2023. A modest rise to 5 per cent has been floated. It would be simple to implement, and politically easy to justify.
- Could a cut in Cash ISA allowances boost UK stock market investing?
- Four scenarios for the UK’s autumn budget
- Will the BoE cut rates and what this means for gilts?
The second option is trickier: reducing the interest paid on reserves that banks hold at the Bank of England. Since the BoE began raising rates, that interest has become a costly burden for the Treasury — more than £21 billion so far this year. Cutting or tiering the rate could generate savings, but would interfere with monetary policy and risk unsettling money markets. A European-style compromise, where only a portion of reserves earns interest, might be more palatable.
UK-focused banks could be hit harder
Either move would shave earnings, though not dramatically. A 2 percentage point surcharge hike would translate into a low single-digit hit to profits for the largest lenders. The pain, however, would not be evenly spread.
UK-focused banks such as Lloyds LON:LLOY and NatWest LON:NWG would feel it most acutely, as nearly all their income falls within the domestic tax net. Global players like HSBC LON:HSBA and Standard Chartered LON:STAN, with most of their profits earned overseas, would barely flinch.
Optics aside, the bigger risk is strategic. Britain already ranks among the highest-taxed banking jurisdictions. Successive governments have chipped away at the surcharge to preserve London’s competitiveness. Reversing that trend could reignite boardroom doubts about whether the UK remains an attractive place to do business.
Still, investors can afford a measure of calm. As Hargreaves Lansdown’s Matt Britzman notes, UK banks remain “well-capitalised, profitable, and positioned to weather modest tax changes.” The real threat to earnings lies less in Whitehall than in the macroeconomy: a slowing housing market, weak credit demand, and the eventual drag of lower interest rates.
Reeves may score an easy political win by clipping a few billion from bank profits. But she would do well to remember that healthy banks underpin the broader economy. Overzealous taxation risks starving the very engine she hopes will drive growth. For now, the City will watch the Budget with wary confidence — and calculators at the ready.
