UK banks are steeling themselves for a windfall tax by stealth as the new chancellor tries to plug a £40bn hole in the public finances.
City lobbyists at UK Finance are concerned that banks will not be compensated for Jeremy Hunt’s U-turn on corporation tax, which will now mean the levy rises from 19% to 25% next year.
It is understood the lobby group is likely to push the point in a letter to the chancellor before the budget update on 31 October. UK Finance declined to comment.
The former chancellor Rishi Sunak had promised last year to cut a sector-specific tax known as the banking surcharge from 8% to 3% to make up for the increase. However, Hunt has not made any commitment to do so, despite fears that banks would now have to prepare for a headline tax rate of 33%, rather than 28% as previously promised.The move was expected to save banks £4bn over five years.
Smaller lenders including the Co-operative Bank will still benefit from a higher threshold, with the chancellor promising the surcharge will only apply to lenders earning at least £100m, rather than £25m.
A decision to maintain the surcharge at current levels could help the government raise more cash to plug the hole in public finances. A Treasury source rejected the suggestion that the move could be seen as a windfall tax by stealth but said Hunt would confirm his position on the surcharge when he gives his fiscal update.
A Treasury spokesperson said: “We can’t comment on specific speculation, however the chancellor and prime minister have been clear that difficult decisions will be required to restore economic stability and no options are off the table.”
It comes as UK banks prepare to announce potentially bumper third-quarter profits next week, as they reap the benefits of rising interest rates that have increased the cost of borrowing for customers.
Maintaining the surcharge would be seen as a further divergence from the City-friendly agenda of deregulation and tax cuts outlined in Kwasi Kwarteng’s mini-budget last month.
David Postings, the chief executive of UK Finance, the banking lobby group, said the industry already paid a higher overall rate of tax than any other sector, due to the banking surcharge and the smaller 0.1% bank levy, which only applied to certain parts of lenders’ UK balance sheets.
After the decision to revert to the original corporation tax increase, “we urge the government to consider the surcharge very carefully and not put at risk the competitiveness of the UK’s banking and finance industry”, Postings said.
The Conservative MP and former City minister John Glen also raised concerns about a growing tax bill for the UK banking sector. “If the rate is retained as an 8% surcharge, banks will be paying 33%, and when added to the employment costs for national insurance may have issues in terms of competitiveness,” he told MPs in the House of Commons.
Glen’s successor, Andrew Griffith, said he would stay in “very close touch with our very valued banking community” and “continue to drive the competitiveness of the United Kingdom” for the financial services sector.
However, a senior executive at one high street bank said that while they would prefer the levy to be reduced, maintaining it at current levels was much preferred to tinkering with the interest rate that banks earn from deposits held at the Bank of England. Reports emerged in recent weeks suggesting the Treasury was considering cutting the level that lenders can earn from those reserves.
The share price of some large UK banks fell on Wednesday morning, with Lloyds down nearly 3.5%, Barclays 1.4% lower and NatWest falling 2.2%.
