John Healey poised to raise taxes on banks in budget

John Healey is considering increasing the extra tax banks pay on their profits. The likely option is to reverse Jeremy Hunt’s earlier cut, restoring the bank surcharge from 3% to 8%. It matters because the government wants more revenue while borrowing costs are rising and its room under fiscal rules is shrinking.

The surcharge sits on top of corporation tax. Raising it to 8% would apply a higher additional rate to banks’ taxable profits. The Treasury could collect about £2.25bn more each year, according to TUC analysis. Britain’s four biggest lenders have made £200bn in pre-tax profits over five years.

Healey has praised banks as vital to economic growth, but is still believed to favour the increase. Bank bosses oppose higher taxes and warn they could weaken investment and Britain’s attractiveness. Smaller banks are asking for a higher profit threshold, while the TUC wants a much larger rise to 16%.

The bank surcharge is a special additional charge on banks’ profits. Banks already pay corporation tax, which applies to company profits generally. The surcharge is separate and applies specifically to banking businesses, so it increases their combined tax burden.

For example, if the surcharge returns to 8% from 3%, a bank would face a larger extra charge after corporation tax has been considered. The article does not give the full combined tax calculation. It reports that reversing Hunt’s cut could raise about £2.25bn annually.

The distinction matters because the government can target banks without raising the main corporation tax rate for all companies. Banks argue that higher taxes could weaken investor confidence and push staff and business abroad. The TUC, however, says banks’ strong profits justify a larger contribution to public finances.

The proposed surcharge increase could bring the Treasury about £2.25bn extra each year, according to TUC analysis. That would provide meaningful revenue, but it would not replace the government’s entire fiscal cushion. The comparison matters because rising borrowing costs are putting pressure on Labour’s deficit-reduction plans.

At the spring forecast in March, Rachel Reeves had built a £24bn headroom against the government’s fiscal rules. Analysts now suggest higher borrowing costs could reduce that cushion by as much as half. The possible bank-tax revenue therefore equals less than one-tenth of the original £24bn figure.

Healey is understood to accept a narrower headroom but wants bond markets to believe he remains committed to reducing the deficit. The bank surcharge is one way to raise money without cutting other departments further. The TUC wants a far higher 16% rate, claiming it could raise £24bn over four years.

The government’s deficit-reduction plans depend partly on controlling borrowing and preserving fiscal headroom. When borrowing costs rise, issuing and refinancing government debt becomes more expensive. More money may then be needed for interest payments, leaving less room for spending plans or tax reductions.

The article links recent market movements to the prospect of higher inflation caused by the war in the Middle East. Bond markets have responded by pushing up the cost of borrowing for Britain and other major economies. Analysts say this could reduce the £24bn cushion built against Labour’s fiscal rules by as much as half.

That creates a difficult balance for Healey. He wants to accept a smaller headroom while convincing investors that deficit reduction remains central. Raising bank taxes could provide extra revenue, but the government must also consider industry warnings that higher taxes could damage investment and Britain’s financial-sector appeal.

Higher bank taxes could affect more than government revenue. Industry groups warn they may weaken investor confidence and reduce the UK’s attractiveness as a financial centre. Bank leaders also say some staff and business could move overseas if the tax environment becomes less favourable.

The clearest example is Jamie Dimon’s warning that JP Morgan could abandon plans for a new £3bn London headquarters if the government became hostile to banks. That tower would house more than half of the bank’s 23,000 UK employees. The article also notes government concern about startup banks and their lending to small businesses.

The effects are contested. Banks and their lobby groups oppose higher levies, while the TUC argues that strong profits support a larger tax contribution. Healey must therefore balance extra revenue against investment, employment, lending and the UK’s position as a financial centre.

The surcharge threshold is the profit level at which the additional bank tax begins to apply. Specialist banks, including Revolut and Shawbrook, want that threshold raised from £100m to £500m. A higher threshold would mean more banks with profits between those amounts avoided the surcharge.

The article gives no detailed calculation of how many lenders would benefit. It does explain the policy concern: Labour is mindful that Britain must remain a positive environment for startup banks. Those newer lenders provide lending to small businesses, so a lower tax burden while they expand could support that part of the market.

This request contrasts with the TUC’s position. The union wants the surcharge raised to 16%, arguing that this could raise £24bn over four years. Healey must weigh the specialist banks’ growth concerns against the Treasury’s need for revenue and the larger lenders’ strong profits.

Banks generally make money from the difference between the interest they charge borrowers and the interest they pay savers or other funders. This difference is often called the net interest margin. When rates rise, banks may earn more on loans, especially if loan rates increase faster than the rates paid on deposits.

The article links lenders’ strong earnings to rising interest rates. It also says the big four banks’ profits were driven by high rates alongside households’ mortgage misery. Borrowers with mortgages can face higher monthly costs when lenders pass higher interest rates through to them. That raises household pressure while banks’ lending income can increase.

The outcome is not automatic for every bank or customer. It depends on loan and deposit pricing, competition and the type of mortgage. But the political argument is clear: strong bank profits during a period of expensive mortgages have prompted unions and thinktanks to demand a larger tax contribution.