UK banks are bracing for potential tax increases as expectations grow that Prime Minister Keir Starmer could soon be replaced by a more leftwing Labour politician. The banking sector narrowly avoided a tax hike in last year's Autumn Budget after Chancellor Rachel Reeves sought assurance that banks would boost lending and publicly support her fiscal plans. However, the ongoing Mandelson vetting scandal and increased awareness that both Starmer and Reeves could be ousted have left banks fearful.
Industry Concerns
A senior executive at a large lender told the Financial Times that the industry "should be worried," particularly after their "astonishing escape" last year. An executive at a Wall Street bank said it was building financial models to examine the likely impact of a more left-leaning Labour figure becoming prime minister, alongside Reform UK winning the next election. The executive stated: "We don't think Starmer will last long. Everybody would like to keep Rachel Reeves as chancellor, but the odds of that seem slim."
Existing Levies and Potential Increases
In recent years, banks have paid a levy on their balance sheets and a surcharge tax on profits, in addition to standard corporate taxes. A boost in profits among some of the UK's biggest banks has led to calls from the Labour left to raise these levies. Former Deputy Prime Minister Angela Rayner, among the favourites to succeed Starmer, has long supported these calls. Last year, she proposed increasing the "bank surcharge to five per cent" to raise an estimated £1.5 billion a year. The surcharge was introduced at eight per cent in 2016 but was cut to three per cent in 2022. A weak fiscal outlook could prompt ministers to re-examine a bank tax increase, according to one executive at a UK bank.
Bond Market Concerns
Banks and regulators are also anxious about the potential for a bond market sell-off, which could cause problems similar to those triggered by former Conservative Prime Minister Liz Truss's mini-budget in 2022. A senior UK financial regulator said: "The risk of a sovereign debt crisis is there. Banks need to be stress testing the interest rate risk in their balance sheets." Investor concerns over the UK's high debt levels and political uncertainty have pushed borrowing costs to the highest among G7 nations, with ten-year gilt yields hovering close to five per cent. This means Reeves may once more be forced to raise taxes, but another banking executive argued that the case for a sector raid this time was weaker as banks were increasing provisions. They claimed Reeves would fend off calls for tax hikes as long as she remained chancellor.
Bank Profits and Share Prices
Profits at Britain's banks have increased recently as higher interest rates boost margins. Over the past year, NatWest's share price is up 24 per cent, while Barclays has surged 47 per cent.
