How Rachel Reeves could make the banks pay more tax

It’s been the golden rule for finance ministers since Jean-Baptiste Colbert, Louis XIV’s energetic chief tax collector, coined it more than 300 years ago. Pluck the goose in a way that maximises the feathers while minimising the hissing, he advised.

No wonder, then, that speculation has emerged suggesting that Rachel Reeves might target banks as an easy way of harvesting a decent cache of feathers with comparatively little hissing. Except, perhaps, in corners of the City of London.

Sir Keir Starmer suggested in a speech last month that those with the “broadest shoulders” would have to take a disproportionate amount of pain in the October budget. Banks have few friends while their shoulders have been getting ever wider as they churn out growing profits, cash regarded by many as windfalls from higher interest rates that should be tapped for the greater good.

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“No one is going to shed any tears if the banks are forced to hand over more of their profits,” Dan Coatsworth, an analyst at AJ Bell, the investment platform, said. “It’s about as easy a target as you can get.”

Bank shares wobbled for a while amid concerns about a substantial grab by the chancellor, but then mostly recovered. “We’re always an easy target,” one senior banker said, “but we’ve not seen any evidence yet of the Treasury starting to reach out and ask the kind of questions that might suggest they are thinking about a new hit.”

Nevertheless, British-based banks are stepping up their lobbying efforts against possible tax increases in the government’s inaugural budget on October 30, amid mounting worries that it may tap the cash-rich sector to boost the nation’s finances. Reeves is due to meet senior representatives of the banking sector in the coming days and bankers expect a rise in taxes on lenders’ profits to be discussed.

Banks already pay two specialist levies that are not imposed on any other kind of company.

One is the bank profits surcharge, an extra tax on profits that comes in addition to corporation tax. This was introduced by George Osborne in 2015. At present it stands at 3 per cent on any profits above £100 million and comes on top of the standard 25 per cent corporation tax paid by all companies. Raising this could be the simplest way that Reeves could tap the sector to help to fill a multibillion-pound hole in the public finances.

The other is the so-called bank levy, a tax on a bank’s overall balance sheet introduced to compensate the country for, in effect, underwriting banks regarded as being too big to be allowed to fail. This is set at 0.05 per cent to 0.1 per cent of total liabilities in excess of insured deposits, depending on the type of liability.

The profits surcharge raised about £2.6 billion for the exchequer last year, according to an estimate by PwC. The bank levy raised another £1.6 billion, according to a calculation by the Office for Budget Responsibility. Together, then, banks paid about £4.2 billion in taxes that other companies were not required to pay. That amounts to about 0.3 per cent of all tax receipts and equates to two thirds of a penny on basic rate income tax, or the equivalent of nine days’ spending on the NHS in England.

Last year the TUC argued in a report that it could be so much more, pointing out that the bank profits surcharge used to be set at 8 per cent. It was reduced as part of a move to soften the blow to banks when corporation tax was lifted from 19 per cent to 25 per cent in April 2023. Reversing that concession would raise an extra £6 billion to £6.5 billion over four years, the union body said. Boosting it to 35 per cent, which is the levy on windfall profits made by energy companies, would bring in an extra £26 billion to £28 billion over that time span. Adjusting the surcharge and the levy so that they bring in the same revenue as they did in 2016-17 would deliver £15 billion over four years.

The bank levy also has come down in recent years. It raised as much as £3.2 billion in 2015-16, according to the OBR, but the rate has been slashed and the rules watered down so that only the UK liabilities of global banks are counted, reducing the scope of the levy.

There’s not much doubt that the Treasury could tap the banks more heavily if it chose to. Some of the more radical TUC proposals could move the dial in addressing the newly discovered £22 billion hole in the public finances claimed by Reeves, a claim hotly disputed by the Conservatives.

Tax rises are justified, it is argued by some, not only because of the implicit government guarantee that instils confidence for anyone saving up to £85,000 in any UK bank, but also because of the favoured position of banks in receiving interest at the base rate on their reserves held at the Bank of England. This presently earns them £40 billion a year.

Banks argue that any increase in UK taxes on banks would diminish their international competitiveness and would raise their future cost of capital, potentially forcing them to widen their margins to compensate. Britain’s banks are already taxed more aggressively than many of their international rivals, the industry believes, and increasing the sector’s costs via taxes could have an impact on the cost and availability of credit.

“Put crudely, mortgages could cost more and deposit rates could be lower,” one bank chief executive said, adding that the extra taxes on banks were punishment for the global financial crisis. “That was 17 years ago. How long is it going to go on for?”

Higher taxes on profits would reduce dividends, too. Banks are significant contributors to pension schemes and to income funds. HSBC was the biggest single payer of dividends in the FTSE 100 last year, while Lloyds Banking Group was the fifth biggest.

One new anxiety expressed by some on Lombard Street, in the heart of the City, is that the government might introduce a new tax on bank share buybacks, a hugely popular way for banks to return spare capital to shareholders. Such a tax could be justified as encouraging banks to retain capital and therefore lend more to promote higher economic growth.

A spokeswoman for UK Finance, the banks’ trade association, said: “The banking sector is a major contributor to the UK’s tax base and supports a large number of skilled jobs while delivering growth and investment up and down the country. Banks’ profits allow them to invest in their businesses for the benefit of customers and to deliver shareholders, including pension funds, a return on their investment.”

With payouts from the mining sector shrinking sharply because of lower minerals prices, the income from banks has become progressively more important for some institutional investors. Banks will be the UK’s “biggest engine of dividend growth this year”, according to recent research by Computershare, the share registrar.

Banks argue that they are already big tax contributors. A study last year by PwC, the professional services group, for UK Finance found that the total tax contribution of the banking industry had reached £41 billion last year, the highest figure for ten years. That number, however, included £18.9 billion of taxes merely collected, such as income tax paid by employees on their wages. Taxes actually borne by banks, including employers’ national insurance contributions and irrecoverable VAT, amounted to £22.1 billion.

As a percentage of UK GDP, the total tax contribution number is also less impressive. It has fallen over the past ten years from 5.9 per cent to 4.6 per cent. Banks aren’t contributing as much of the economic pie as they used to.

UK Finance is on stronger ground when it comes to international comparisons. The total tax rate paid by London-based banks was 45.5 per cent in 2023, as against 27.9 per cent for a New York-based competitor, 32.4 per cent in Dublin, 38.5 per cent in Frankfurt and 37.2 per cent in Amsterdam, it said. “Our analysis shows that they are expected to pay notably higher rates of tax in future years than in other European capitals.”

One joker in the pack is the government’s remaining stake in NatWest, formerly Royal Bank of Scotland. It could look awkward for the Treasury if it were to continue to sell its remaining NatWest shares over the coming months while secretly plotting a new tax on bank profits.

There’s a long way until the budget on October 30. The City’s lobbying power (Nigel Higgins, the chairman of Barclays, is on Reeves’ City advisory panel) would be set in train to preserve the banks’ feathers if a new plucking were to be seen as a serious threat. There will still be hissing, but it will be behind closed doors.