Raising the bank surcharge from 3 per cent back to 8 per cent would forgo around 6 billion pounds of UK output over the five years of the Budget forecast, rising to nearly 20 billion pounds over ten years, the banking lobby has told John Healey in a last ditch attempt to head off a tax rise on 28 October.
In a letter sent to the Chancellor on Monday, David Postings, the chief executive of UK Finance, argued that a near term increase in tax revenue would come at the expense of the lending and investment needed to reindustrialise the economy and drive growth in every part of the country. The intervention comes eight days before a Budget in which the surcharge is widely expected to rise.
The jewel in the crown pushes back
Mr Healey publicly praised the sector at the International Monetary Fund meetings in Bangkok last week, describing banks as a big contributor to the economy and part of the jewel in the British economic crown. Behind the warm words, however, Treasury officials continue to lean towards raising the surcharge, which Jeremy Hunt cut from 8 per cent to 3 per cent in 2023, as the simplest way to extract around 2 billion pounds a year from a sector enjoying booming conditions.
The big four banks collectively made about 15 billion pounds of profit in the first six months of this year, helped by interest rates that have widened the margin between what they charge borrowers and what they pay savers. The unions say that is precisely why they should pay more. Paul Nowak, the general secretary of the Trades Union Congress, said the biggest lenders were making a billion pounds a week while households struggled with mortgage costs, and that asking banks to pay a fairer share would be the right call.
The Surcharge Row in Numbers
- The bank surcharge stands at 3 per cent, cut from 8 per cent by Jeremy Hunt in 2023.
- Restoring 8 per cent could raise around 2 billion pounds a year for the Treasury.
- UK Finance says the move would forgo 6 billion pounds of output over five years and nearly 20 billion pounds over ten.
- The big four banks made about 15 billion pounds of profit in the first half of 2026.
- Lloyds and NatWest shares each fell more than 2 per cent on Friday as the plan firmed up.
Too big to fail, too big to tax?
Not every City voice is singing from the lobby's hymn sheet. Sir Philip Augar, the author and former banker, told the BBC there was room for a moderate increase in taxes on the sector, which could raise up to 3 billion pounds a year. When the industry hits rocky times it expects the taxpayer to bail it out, he noted, and when times are good it expects special treatment. Banks, he said, cannot be both too big to fail and too big to tax.
The markets have already delivered a preliminary verdict. Lloyds and NatWest, the most domestically focused of the high street lenders, each dropped more than 2 per cent on Friday. Barclays slipped only modestly and HSBC rose, reflecting their large international businesses, which would be less exposed to a UK specific levy.
A Chancellor short of easy options
The row lands at a delicate moment. The International Monetary Fund warned this year that Britain is approaching the point of peak taxation, and the 30 year gilt yield remains close to levels last seen in 1998, squeezing the Chancellor's headroom against his fiscal rules. On Tuesday morning Mr Healey also ruled out a rise in Capital Gains Tax, narrowing his options further and increasing the likelihood that the banks will be asked to write the biggest cheque of the Budget.
Whether the surcharge goes all the way back to 8 per cent, or settles somewhere in between, is now the principal question occupying the City. A partial restoration to 5 or 6 per cent, some analysts suggest, would let the Chancellor claim a fair contribution from the banks while blunting the lobby's warnings on competitiveness. The answer arrives with the red box next Wednesday.