Chancellor John Healey is preparing to implement tax increases on Britain’s banking sector in his upcoming 28 October budget. The move is designed to address the strain on public finances caused by the ongoing war in the Middle East, which has driven up government borrowing costs.
Currently attending meetings in Bangkok, Healey has received encouragement from the International Monetary Fund to maintain the UK’s current fiscal course as it works toward balancing the books. Facing increased pressure from rising debt service expenses, the Treasury is considering reversing previous cuts to the bank surcharge implemented by his predecessor, Jeremy Hunt. Industry analysts suggest this policy shift could generate upwards of £2bn annually. Analysts have suggested that could as much as halve the £24bn cushion Reeves had built up against Labour’s fiscal rules at the time of spring forecast in March.
The banking sector has reported significant profits recently, with the UK’s four largest lenders—NatWest, HSBC, Barclays, and Lloyds Banking Group—collecting £200bn in pre-tax profits over the last five years. Despite this performance, Healey has sought to emphasize the role of banks in the broader economy. During his trip to Bangkok, he noted: “People too often see them as big distant financial institutions, when they are hardwired into the economic fabric of this country and our future prospects.”
Despite these comments, signs point to a reversal of the bank surcharge, potentially lifting it from the current 3% back to 8%. The Trades Union Congress (TUC) has advocated for more aggressive measures, with general secretary Paul Nowak arguing that banks should pay a fairer share, noting that record bonuses and bumper profits have emerged alongside mortgage difficulties for many households. The TUC has proposed a 16% surcharge, which they estimate could raise £24bn over four years. It’s time to make sure banks pay their fair share.”. From 3% at present, industry figures believe that will probably mean raising the surcharge back to 8%. However, industry sources now say they are resigned to a rise in the surcharge. They believe Healey is minded to reverse Hunt’s cut – taking it back to 8% – but not go further. According to analysis by the Trades Union Congress, such a move would raise £2.25bn a year. Healey is expected to duck the longer-term question of when the UK will spend 3% of gross domestic product on defence – the issue over which he resigned as defence secretary in June, contributing to Starmer’s downfall.
Bank executives have lobbied against such hikes, warning that increased levies could harm the UK’s attractiveness to global investors and lead to the relocation of staff and business activities. Some, such as JP Morgan’s Jamie Dimon, have previously warned that a hostile tax environment could derail plans for new London infrastructure. In response, Healey has been evaluating requests from challenger banks like Revolut and Shawbrook to raise the profit threshold for the surcharge from £100m to £500m to protect growth in the startup sector. Saying that on top of “weakening investors confidence and damaging UK attractiveness”, higher taxes would force them to move staff and business out of the country, their lobby groups – including UK Finance and TheCityUK – wrote to Healey days later. According to one government source, Labour was mindful of the UK needing to offer a positive environment for startup banks and especially the lending they offered to small businesses. Not making their lives even harder, labour should be backing businesses and wealth-creators.
Beyond banking levies, the 28 October budget is expected to outline energy support packages for businesses and households, along with details on devolving income tax to mayoralties. It will also clarify funding mechanisms for the government’s four-year defence investment plan. However, Healey has signaled that other Whitehall departments must adhere to spending limits established by Rachel Reeves in June 2025. News of the tower – which will house more than half of the US investment bank’s 23,000 UK staff – was unveiled just days after Reeves spared the sector of further tax rises in her 2025 autumn budget. However, which he stressed would have to stick to the budgets Reeves set out at her spending review in June 2025, there will be little additional funding for other Whitehall departments.
“It’s important that they do manage within what they’ve got, and it’s part of the job,” the Chancellor stated, emphasizing the need for reprioritization to fund new initiatives. This stance comes amid concerns from the Institute for Fiscal Studies that some departments may face real-terms spending cuts under current plans.
The opposition has criticized the proposed tax strategy. Shadow chancellor Andrew Griffith argued that taxing financial services would stifle growth, while Conservative leader Kemi Badenoch suggested the sector already faces a higher tax burden compared to other international financial centers. Meanwhile, Healey remains focused on navigating a narrower margin of fiscal headroom as bond markets react to the threat of inflation linked to the Middle East conflict. Healey is understood to be willing to accept a narrower “headroom” – but is also keen to convince bond markets he is wedded to deficit reduction.
