Rachel Reeves could use bank windfall tax to plug Labour’s U-turns
Rachel Reeves could launch a fresh tax grab on banks to plug the spending holes left by Labour’s recent U-turns, new analysis has found.
The Chancellor is poised to hike taxes in the Autumn Budget after a series of government policy switches eroded her already wafer-thin fiscal headroom of £9.9bn.
This comes as fresh research from Positive Money revealed a 38 per cent levy on banks, in line with the government’s energy profits tax, would cover Labour’s welfare U-turn and raise up to £11.3bn.
The group said a bank levy would target net income from domestic retail banking above a threshold of £800m.
Analysts at JP Morgan warned Reeves will look to raise as much as £30bn in taxes later this year to restore the fiscal buffer left at the Spring Statement.
Britain’s Big Four banks – Natwest, Lloyds, Barclays and HSBC – rounded off earnings season for the second half this week with a combined £24.1bn in pre-tax profit as tax speculation cast a shadow over results.
Big banks warn on tax hike
Simon Youel, head of policy at Positive Money, said the levy would be a “no brainer”, but banking chiefs have sounded the alarm on the implications of a sector tax hike in the last week.
HSBC boss Georges Elhedery cautioned a bank tax would dent growth and “run the risk of eroding our continued investment capacity”.
Charlie Nunn, chief of Lloyds, said a tax “wouldn’t be consistent” with the government’s growth agenda.
The bosses also pointed to the hefty rate already slapped on lenders, with CS Venkatakrishnan adding banks were “among the biggest tax payers in the country”.
The firms are subject to a surcharge which sits on top of the 25 per cent corporation tax.
The surcharge was reduced to three per cent in 2023 but a leaked memo from Deputy Prime Minister Angela Rayner revealed Starmer’s second-in-command had proposed an increase to five per cent – a move which she said would generate £700m in annual revenue for the Treasury.
Banking industry body UK Finance has advocated abolishing the charge in a bid to make the country more competitive.
“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,” head of UK Finance David Postings previously told Morning Wire.
The body submitted a report to the Treasury ahead of the 2024 budget highlighting the disparities in global banks’ tax rates. London’s sector average was 45.8 per cent for 2024, dwarfing European rivals Amsterdam (42 per cent), Frankfurt (38.6 per cent) and Dublin (28.8 per cent).
Reeves’ fiscal fright
The Chancellor faces a fiscal headache heading into the Autumn Budget after saving hopes were crushed by government U-turns.
Reeves looked to shed £5bn in spending through targeting restrictions on personal independence payments (PIP) and limited the sickness-related element of universal credit.
But Labour blinked as rebels looked to derail welfare reforms curbing the Chancellor’s ambitions.
Following a £190bn splurge in the government’s Spending Review in June, Yael Selfin, chief economist at KPMG UK, said if growth was to fall in line with forecasts the government would require a top up of around £20bn, fuelling tax hike speculation.
Growth figures have waned in the last two months with a 0.1 per cent contraction in May and 0.3 per cent in April.
The shrinking of the economy followed Reeves’ 2024 budget tax hikes coming into effect in April, including a 1.2 per cent hike to employer’s national insurance contributions which firms warned would hit jobs and raise prices.
Reeves has branded her £40bn tax raid in the 2024 budget a “one-off,” but economists have warned to maintain her “iron clad” fiscal rules further rises would be inevitable.