UK Banks Brace for Budget Tax Raid After £15bn First-Half Profit

The UK's four biggest banks booked roughly £15bn in profit in the first half of this year, and senior executives now expect the chancellor to take aim at that haul in the Budget due in roughly two weeks. They told the BBC the sector will be "on the menu."

That expectation carries weight because banking already contributes nearly £40bn a year to the Treasury once staff income tax is folded in. John Healey has described lenders as part of "the crown jewels" of the UK economy, yet he's refused to rule out an additional raid on the sector.

The tax stack on lenders is unusually thick. Banks pay the headline 25% corporation tax, plus a 3% surcharge, plus a balance-sheet levy that charges 0.1% on short-term loans and 0.05% on longer-dated ones. Mortgages sit outside the levy calculation. Last year the levy raised £1.4bn and the surcharge a further £1.2bn.

What levers could the chancellor pull?

Three options are circulating in Whitehall.

• Restore the bank surcharge from 3% back to its former 8%, a reversal of what Rishi Sunak did when he also lifted corporation tax from 19% to 25%. That move alone could generate around £2bn a year.
• Freeze banks' ability to offset historical losses against current profits for a few years. Analysts and bank executives believe this route could yield roughly £1bn annually.
• Tweak the bank levy itself, though that lever raises smaller sums.

The trade body UK Finance pushed back hard, warning that "further increases in bank taxes would weaken competitiveness, discourage investment and job creation, and work against the government's ambition to deliver growth in every postcode."

Banks were, in their own telling, pleasantly surprised they escaped the last Budget. Rising interest rates have fattened the gap between what lenders charge borrowers and what they pay savers, and that windfall is now politically conspicuous.

Who benefits from the status quo?

Lloyds has been the standout beneficiary of the loss-offset rule. Losses from the 2008 financial crisis still shelter profits from tax more than fifteen years later, lowering the bank's effective rate well below the headline figure.

One bank executive told the BBC that a temporary moratorium would be "a lot more bearable" than a surcharge hike, partly because it spares foreign lenders operating in the UK.

That distinction matters for names like JP Morgan. Chief executive Jamie Dimon has warned that the UK already carries one of the heaviest bank tax burdens globally, and that piling on more sector-specific charges could "discourage investment and damage competitiveness."

But UK industry leaders counter that any carve-out shielding foreign banks while clobbering domestic ones would clash awkwardly with the government's "back British business" rhetoric. Domestic lenders can't easily redirect lending to Frankfurt or Dublin the way a US bank can.

What does this change for the sector?

Practically speaking, bank boards should pencil in a higher tax bill for next year. The likeliest headline hit lands somewhere between £1bn and £2bn in additional annual Treasury receipts, depending on which lever the chancellor pulls. Lloyds shareholders carry the most direct exposure if the loss-offset route wins out, since the bank has leaned on that relief harder than peers.

Watch the Budget for more than the headline rate. A surcharge restoration signals that profits above a threshold now trigger political attention. A loss-offset pause targets a specific historical quirk.

Either way, the precedent matters more than the pound figure. If banks get hit now, the sector's standing with the Treasury drops below where it sat before Sunak trimmed the surcharge in 2022.