Can banks manage to bypass a Reeves' tax attack come Fall?

Can banks manage to bypass a Reeves' tax attack come Fall?

In the midst of constant Labour U-turns, Chancellor Rachel Reeves is feeling the heat as her financial wiggle room diminishes. Her mantra of making the wealthy shoulder more responsibility might come back into play.

The banking sector narrowly avoided a tax raid in the 2024 budget due to lobbyists' warnings about the potential harm to its international competitiveness. However, renewed fiscal pressure on Reeves and a political play by Angela Rayner could make banks a prime target for the next round of cash grabs.

Reeves' fiscal stability has been gradually eroded following retreats on winter fuel payments and a dramatic U-turn on welfare reform.

The Labour government's welfare bill aimed to save £5bn, but after pushback from 126 MPs, Prime Minister Sir Keir Starmer bowed down to the rebels' demands. Although Starmer's concession comes with a price tag, with the Institute for Fiscal Studies estimating the adjustments to personal independence payments (PIP) could cost up to £1.5bn alone.

This new burden on the Chancellor's dwindling £9.9bn headroom follows Reeves' £190bn spending spree in the Spending Review and Starmer's £1.3bn winter fuel U-turn.

According to Oxford Economics, tax rises in the Autumn are increasingly probable. The looming increase in taxes renews concerns that banks will bear the brunt of Reeves' quest for fiscal headroom, following a leaked memo revealing that the Deputy Prime Minister proposed banks as a means to plug fiscal gaps.

Rayner called for an annual £700m increase on the banking sector through modifications to the surcharge.

Banking industry body UK Finance strongly objected to the proposals, arguing that the sector already makes a substantial contribution to the UK's tax base. The industry's total tax contribution for the 2023/24 financial year is estimated to be near £44.8bn – a 4.7% increase from the previous year and a record high.

David Postings, UK Finance's chief executive, noted, "Banks based in the UK already pay a significantly higher rate of tax than those in New York and are expected to pay notably higher rates of tax than in other European capitals."

British lenders are subject to an additional surcharge of three per cent, which sits on top of the standard 25 per cent in Corporation Tax. Rayner's proposal extended the surcharge to five per cent, equating to a 30 per cent Corporation Tax for banks.

The sector's total rate, a staggering 45.8 per cent, eclipses the more appealing tax policies in European competitors such as Amsterdam (42%), Frankfurt (38.6%), and Dublin (28.8%). Postings suggested, "The tax environment has an important bearing on investment decisions and growth. To make the UK's approach to bank taxation globally competitive, we think the government should phase out the bank corporation tax surcharge and the bank levy over time."

In the last year, the banking sector enjoyed record profits as interest rates reached a post-financial crisis high. The FTSE 100 Big Five banks – Barclays, HSBC, Natwest, Lloyds, and Standard Chartered – generated an all-time high of £50.3bn in profit in 2024 and returned £35bn to investors.

[1] The current corporate tax rate for financial institutions and banks in the UK stands at 12% under the Temporary Repatriation Facility (TRF) election, increasing to 15% in subsequent years.

[2] The UK's corporate tax rate for companies with profits over £250,000 is typically 25%, while smaller profits face a tapered rate.

[3] The Bank of England's interest rate stands at 4.25%, compared to roughly 2% in the Eurozone.

[4] The preferential tax rate for financial services under the TRF scheme acts as a fiscal incentive that partially balances other economic pressures such as higher interest rates and inflation in the UK.

[5] The preferential tax rate for financial services under the TRF scheme, at 12%, is positioned competitively within the European context, especially for those qualifying under the TRF scheme.

1. Despite the banking sector's record profits and substantial contribution to the UK's tax base, calls for increased taxes on banks are escalating, as the Chancellor, Rachel Reeves, seeks ways to expand her fiscal headroom.
2. Angela Rayner's proposal to raise £700 million annually from the banking sector by increasing the surcharge has drawn significant opposition from the industry, arguing that the sector already pays a significantly higher rate of tax compared to other global competitors.
3. With the looming increase in taxes and the Labour government's ongoing financial pressures, the economy, finance, and political landscape could see significant shifts in the business and finance sectors, particularly in the banking industry, as more tax proposals are considered amidst general-news headlines.

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