A recent analysis suggests that implementing a windfall tax on major banks in the UK could potentially generate over £11 billion in revenue for the government. Chancellor Rachel Reeves is facing pressure to raise taxes in the upcoming Budget to address financial shortfalls, with one proposal being to increase levies on banks due to their advantage from high interest rates.
HSBC, the last of the Big Four banks to disclose its half-year profits, reported a substantial profit of nearly £12 billion despite a 25% decrease compared to the previous year. Alongside Lloyds Banking Group, NatWest, and Barclays, these banks collectively earned £24 billion in just six months and are projected to reach a record £48 billion this year.
While the former Tory Chancellor Jeremy Hunt reduced the bank surcharge in the autumn Statement of 2022, think tank Positive Money is advocating for a new surcharge of 38% to align with the Energy Profits Levy on oil and gas companies. This move is estimated to bring in £11.3 billion from the Big Four banks this year, potentially covering costs such as welfare reforms. Positive Money also suggests a levy similar to Spain’s that targets profits exceeding £800 million from banks’ domestic retail banking arms.
Positive Money argues that banks have benefited from higher interest rates set by the Bank of England, leading to excessive profits. The proposal aims to balance profitability while preventing banks from extracting disproportionate gains from the economy. However, bank executives caution against imposing additional taxes on the sector, highlighting potential impacts on lending capacity and economic growth.
The Tories previously introduced a surcharge on corporation tax for banks, which has evolved over the years. The Office for Budget Responsibility indicates that the surcharge raised £1.5 billion in 2023/24 and is projected to contribute another £7 billion over the current parliamentary term.
Positive Money’s recommendation does not involve increasing the existing 3% surcharge but proposes a new 38% levy on bank retail arm profits above £800 million. UK Finance data shows that the banking sector contributed £44.8 billion in total taxes for the previous financial year, representing a significant portion of UK government tax receipts. Comparing the UK’s tax rate with other financial hubs like New York and Frankfurt, London’s tax rate stands notably higher.
Overall, the debate around imposing a windfall tax on banks continues, with contrasting views on the potential impact on the financial sector and the economy as a whole.