What is a windfall tax?
A windfall tax is a one-off or temporary levy on profits a government considers unearned, the product of luck or outside events. Britain has form: Gordon Brown (also famous for the stupendously terrible sale of the UK's gold reserves) raised £5.2bn from his 1997 tax on the privatised utilities, and the Energy Profits Levy on North Sea oil and gas raised around £9bn in its first three years. The case for taxing banks is that higher interest rates, not cleverness, have boosted their profits.
Why now?
In short, the Chancellor, John Healey, needs money and has few options. Income tax, National Insurance and VAT are ruled out. The OBR gave him £24bn of headroom against his fiscal rules in March; estimates since the autumn rise in gilt yields from EY, Bloomberg Economics and the Resolution Foundation put it at £5bn–£12bn, while the IFS's Green Budget on Monday sketched a plausible scenario of around £20bn in 2029-30, because higher inflation also lifts tax receipts.
The IFS's bigger point is that headroom isn't the real constraint: inflation is eroding departmental budgets, and meeting Labour's spending ambitions would take around £35bn more over the coming years, without which, it warned, the plans risk being "a work of fiction". On Tuesday the FT reported he has rejected calls to equalise capital gains tax with income tax, taking one big revenue raiser off the table.
Late-August reports said the Treasury was weighing a time-limited bank profits tax modelled on the EPL, and Bloomberg reported on 2 October that the City fears a domestic-only version. On 6 October, City minister Lucy Rigby hosted bank bosses in Downing Street, with Healey reportedly in "listening mode"; as one attendee told the Times, "Nobody came out any the wiser." So this is still speculation, not policy.
Where we are now
Banks already pay more than most companies. On top of 25% corporation tax, they pay a 3% surcharge on profits above £100m and a separate levy on their UK balance sheets. HMRC says the sector paid £39.1bn in 2025-26, though £26.8bn of that was PAYE on staff pay; corporation tax was £9.7bn, and the surcharge and levy together about £2.6bn. On the industry's own measure, a model London bank faces a total tax rate of around 46%, against 39% in Frankfurt and 28% in New York (UK Finance/PwC).
But the profits are big too. The big four, Barclays, HSBC, Lloyds and NatWest, made £45.7bn in 2025 on Positive Money's count (group figures, so not all of it British), and in the first half of this year Lloyds rose 23% to £4.3bn, NatWest 20% to £4.3bn and Barclays 17% to £6.1bn. Much of that comes from the structural hedge, which locks in rates on deposits over several years; Lloyds alone expects more than £7bn from it this year. The cash is also flowing to shareholders: Barclays plans more than £15bn of distributions across 2026–2028.
The menu
Four questions for each option: what's taxed, what it raises, who pays, and what could go wrong.
Raise the surcharge. This taxes UK bank profits above £100m, using machinery that already exists. Hargreaves Lansdown sees a rise to around 5% as most likely; the TUC wants a return to 8%, which it now estimates would raise about £9bn over four years, so roughly £2bn a year. The immediate hit falls on shareholders, though some of the cost can be passed on through slightly worse savings rates and dearer loans. The risk is that it hits every bank over the threshold, including challengers such as Monzo and Revolut, which are lobbying for the opposite: a bigger allowance.
A windfall profits levy. This would be a temporary extra rate on profits, EPL-style; Positive Money has proposed 38%. Bloomberg puts the big four's UK-only first-half profits at about £13bn, so 38% of an annualised UK figure would give roughly £10bn a year before any allowance. That's an illustration, not an alternative costing (my crap maths). The immediate hit is to shareholders, as valuations would likely be affected. The risk is design: the base, the threshold and the definition of "excess" decide the yield far more than the headline rate does.
Tax the QE windfall. Thanks to quantitative easing, banks hold around £640bn of reserves at the Bank of England, which pays Bank Rate, 3.75%, on them: roughly £24bn a year (again, my crap maths). That is the gross payment to banks, not the cost to taxpayers. The Bank also earns coupons on the gilts it bought, and the Treasury covers only the shortfall, plus losses when gilts are sold for less than was paid; the OBR's March forecast put the net interest losses alone at about £6bn in 2026-27.
The IPPR proposed a "QE reserves income levy" in August 2025, echoing Geoffrey Howe's 1981 tax on banks' deposit windfalls, worth £7bn–£8bn a year at the time; the New Economics Foundation suggests "tiering" reserves so part earns no interest, as the ECB has done since 2023. Who pays depends on the design: which reserves and income are covered, and whether some are exempt or tiered. The risks: Governor Andrew Bailey warns tinkering could weaken the Bank's control of interest rates, and the yield shrinks as rates fall and QE unwinds.
The counterargument
The banks' case is that there's no windfall left to tax. Bank Rate is already down to 3.75%, and much of today's income is hedge income locked in years ago, the reward for managing deposits prudently rather than a lucky break. There's economics behind the lobbying too. Bank taxes tend to be passed on to customers through lower savings rates and costlier loans. They also cut retained earnings, one source of new capital, which can constrain lending at the margin, although how much depends on banks' existing buffers, regulatory requirements and the profitability of new loans. And unpredictable tax raises the return investors demand.
A domestic-only version would hit the banks lending to British households and small businesses while sparing international investment banks; JPMorgan's Jamie Dimon told Bloomberg TV it would "lack principle". The overseas record is sobering: when Italy announced a surprise 40% bank windfall tax on 7 August 2023, its banks lost close to €9bn of market value the next day, and that evening the economy ministry said the levy would be capped. When the decree became law that autumn, banks were allowed to put two and a half times the bill into non-distributable reserves instead, and almost all the big lenders did, leaving the Treasury roughly €1.8bn short. The lesson is about design and market reaction, not the eventual cost of the tax. More on this in Part Two.
My read
My preference would be for Healey to leave the banks alone. An interest rate of 3.75% is not out of the norm by historic standards, so to claim we are in "exceptional circumstances" seems facile. But, short of options, there could be a respectable case for taxing the part of bank income that genuinely is a windfall, the interest on QE reserves, created by policy rather than skill, provided it's done in a way the Bank of England can live with. There is little to no case for a crude tax on all bank profits, which would fall hardest on the banks doing the most domestic lending just as the government wants growth.
My forecast is a different matter. If Healey does anything, the path of least resistance is a modest surcharge rise, possibly dressed as temporary, because it's simple and easy to explain. Nerves are already visible: Lloyds fell 7% and Barclays almost 10% in the month to 6 October, partly on gilts, and in August last year a single IPPR proposal wiped around £8bn off the sector in a day. Investors may respond better to a clear, predictable measure than to months of uncertainty.
The Comms Read
The banks have a sequencing problem. Barclays reports Q3 results on 22 October, the week before the Budget; NatWest reports on 30 October, two days after. So Barclays must talk about distributions without knowing the tax outcome, while NatWest will field Budget questions live on its results call.
The lesson for their IR and PR teams isn't to hide shareholder returns but to frame them properly: buybacks come from surplus capital after lending commitments have been met, and that context should sit alongside the numbers, not in a footnote. A buyback announced in isolation a week before a possible windfall tax would be a gift to the Treasury. The banks need to focus on how much they are doing for the UK economy, and be candid that any additional costs would have to come from somewhere, whether that's lending appetite or what customers pay.
What to watch
Barclays' results on 22 October; the Budget on 28 October; and NatWest's results two days later. Part 2 on Saturday: what would a bank windfall tax actually do to lending, share prices and the Treasury's coffers?
Disclosure: I hold shares in a number of banks and financial services companies.
Time will tell. GLA & DYOR.
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