What we know, and what we don't
On Thursday Bloomberg reported that John Healey plans to raise taxes on banks in the 28 October Budget, to help fund cost-of-living support and steady the public finances.
According to people familiar with the matter, it is one of the major measures already sent to the OBR for costing, and it would likely mean raising the bank surcharge, though details could change. The Guardian and the Telegraph report that the surcharge could go back to 8% from 3%, while the BBC says a higher bank levy and a pause on banks using past losses to cut their tax bills have also been discussed.
The same day, in Bangkok, Healey called banks "part of the jewel, if you like, in the British economic crown". Then he added: "That said, I've got decisions to take in the budget and I will." The Treasury's line is unchanged: tax decisions are for the Chancellor to set out at fiscal events.
So: widely and credibly reported, not confirmed. Everything below assumes a return to 8%, the option most reported, with the rest treated as possibilities.
What would it raise?
Not as much as the headlines suggest. HMRC says the surcharge raised £1.2bn in 2025-26 at 3%, or roughly £400m for each percentage point. Going back to 8% would therefore raise something like £2bn a year before any change in behaviour (back of fag packet maths), in line with the "more than £2bn" in the Guardian and the TUC's £2.25bn. That's a static estimate: the OBR's official costing will allow for how banks respond, and any longer-term effect on lending and future profits is a separate question again. Either way, against the £35bn of spending pressures the IFS identified this week, it is useful, but nowhere near a silver bullet.
It's worth being precise about what a "reversal" means. Before April 2023, banks paid 19% corporation tax plus an 8% surcharge, 27% in total. Rishi Sunak cut the surcharge to 3% precisely because corporation tax was rising to 25%, leaving banks at 28%. Putting the surcharge back to 8% on top of today's 25% would take them to 33%, the highest combined rate on bank profits since the surcharge was introduced. A fact the banks will want everyone to hear.
What would it do?
To profits. On the profits it covers, a rise from 28% to 33% cuts what's left for shareholders by about 7%. Painful, but not existential for banks making near-record profits. On Friday, Lloyds and NatWest led the FTSE 100's fallers, down around 2% in early trading and still down more than 1.5% in the afternoon, while Barclays barely moved, the wider index was flat and eurozone banks rose. The market's message: this hurts, though after weeks of speculation some of it may already have been priced in. One day's trading can't tell us much more than that.
To customers and lending. This is the tricky one. Bank taxes tend to be passed on, through lower savings rates, dearer mortgages and tighter lending at the margin. One senior banker put it bluntly to the Telegraph: "They'll just pass those costs on." UK Finance has written to Healey claiming an 8% surcharge would cost around £6bn of lost output over five years and nearly £20bn over ten.
Those figures come from the industry's own lobby group and should be read that way, but the mechanism is real: less retained profit means less capital to lend. How much is passed on depends on competition. Challengers whose profits sit below or near the £100m allowance, above which the surcharge applies, could undercut the big lenders, which limits how far the big four can push up prices.
To investability. This is the subtler cost. UK banks spent much of the last fifteen years failing to earn their cost of capital and have only recently won back international investors. Another tax rise, after the 2009 bonus tax, the levy and the surcharge, reinforces the perception that British banks are a political cash machine to be raided when money is short. That shows up not in this year's tax take, but in what investors will pay for them, and so in the sector's cost of capital.
probablty On the plus side, a surcharge rise is hard to avoid. Unlike Italy's 2023 windfall tax, which banks legally sidestepped by moving money into reserves, or the Czech Republic's excess-profits tax, which was expected to raise CZK33bn and brought in a fraction of that, this changes the rate on a tax that already exists, on profits that are already declared. The yield should be fairly predictable, which is exactly why it appeals to a Chancellor with little room for surprises.
Who wins, who loses
The big four lose most, because they make most of the profit above the £100m allowance. Challengers such as Revolut and Shawbrook are lobbying for it to rise to £500m. Pair that with a higher rate and Healey can tax the biggest banks while claiming to back competition. That is probably the political sweet spot and I'd be surprised if the Treasury hasn't spotted it.
The counterargument
The case for taxing the banks harder is simple and politically powerful. The TUC's Paul Nowak says the big four are "making a billion pounds a week". Profits are near records, shareholders are receiving tens of billions in buybacks and dividends, and much of the windfall came from higher interest rates rather than better banking services or operational execution. Restoring a rate that existed three years ago is hardly confiscation. On the other side, the Conservatives' Andrew Griffith says a raid on financial services "will stifle" growth, and the CBI has warned against measures that undermine competitiveness.
My read
As I said on Thursday, my preference would be for Healey to leave the banks alone. However, short of options, if he must raise taxes on banks, he should look at the interest paid on QE reserves, which was created by policy rather than skill. That isn't cost-free either: changing how reserves are paid interest gets tangled up with the Bank of England's control of interest rates and the Treasury's indemnity for QE losses, which is why Andrew Bailey has resisted it. But at least it targets the part of bank income that looks most like a genuine windfall.
A surcharge rise is the opposite: a blunt, and I would say intellectually lazy, tax on all big-bank profits, whether or not they came from a windfall, falling hardest on the lenders doing the most domestic lending.
But it is a political winner. It is simple, quick, hard to dodge, raises real money and polls well. If the reports are right, in my view Healey has chosen the option with the weakest economic case and the strongest political one. The details will matter: whether it's presented as temporary, whether the allowance rises, and whether it comes with anything the banks want, such as faster ring-fencing reform.
As for the banks, I suspect they will want to keep their shareholders happy. International investors have plenty of banks to choose from, so I can't see the generous shareholder returns slowing down. The money will be found, and my fear is that a good share of it will come from the pockets of their domestic customers. How much depends on how hard competitors and challengers push back, and that is the risk to watch rather than a foregone conclusion.
The Comms Read
Healey's own messaging was the real story this week. Calling banks the jewel in the crown on the same day his tax plans leaked is pretty feeble. Similarly, complaining that "speculation in the past has done real damage" while the details of your Budget plans appear across the media makes it look as though the Treasury is struggling to control its own message. To be fair, leaks don't prove where they came from, and Healey's comments didn't confirm the plan, but the optics were poor.
For the banks, the sequencing problem from Part 1 is now live. Barclays reports on 22 October, before the Budget; Lloyds on 29 October and NatWest on 30 October, the two days after it. Barclays will be asked about tax it doesn't yet know, while Lloyds and NatWest will have to quantify it live on their calls.
There may be a temptation to warn that customers will end up footing the bill. For the love of God, resist it. To ministers, that will sound like a threat. A better message is evidence: lead with what they already pay and what they lend, to whom; quantify what a smaller capital buffer would mean for that, separating modelled impacts from guesswork; and acknowledge the pressure on the public finances rather than sounding entitled to a particular tax rate.
What to watch
Barclays' results on 22 October; the Budget on 28 October; Lloyds and NatWest straight after; and whether the £100m allowance moves. The OBR's costing will tell us how much the Treasury really expects to raise.
Time will tell. GLA & DYOR.
Disclosure: I hold shares in a number of banks and financial services companies.
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