Lloyds Banking Group has warned the Treasury not to look at the banks for a tax raid as the industry sets its sights on booming profits in 2026. The FTSE 100 giant beat profit expectations by a cool £200m in the first quarter after booking £2bn. This was also followed by an upgrade to its income target on the back of a higher interest rate outlook.
Rising profits spark tax concerns
Banks are expected to bring in a higher-than-originally anticipated cash haul this year after the conflict in the Middle East fanned the flames of inflation, leaving central banks hesitant to chop rates. Rachel Reeves doubled down on the government’s energy profits levy on Tuesday, telling the House of Commons that the likes of BP’s bumper profit haul on the back of soaring oil prices from the Iran war must be “taxed appropriately”. A small fraction of BP’s – along with its peer Shell – revenue comes from the UK, with the firm boasting a significant international footprint.
The rising profits of the banking sector from the Middle East volatility have raised questions whether the industry will too be targeted for a cash raid as the Chancellor looks to ease the economic impact of the war, which recent analysis has suggested could be up to £35bn.
Analysts weigh in
Gary Greenwood, equity analyst at Shore Capital, said: “The sustainability of the group’s elevated returns on tangible equity could come into question should the Government revisit the prospect of further bank taxation.” Neil Wilson, investor strategist at Saxo Markets, added: “Banks could also be ripe for a tax grab soon” following Lloyds’ bumper quarter.
The banking industry has also been in the hot seat following recent tensions in Number 10, with fears that should Prime Minister Sir Keir Starmer be removed, Reeves – who has shown hesitancy in taxing the sector – will follow suit.
Lloyds defends bank profitability
William Chalmers, Lloyds’ chief financial officer, said on Wednesday: “The sector always expected, and one should always expect, a gradual increase in profitability of banks in the context where rates rise.” Lloyds said “changes in interest rates” had led the firm to predict net interest income would be “greater than” £14.9bn for the year. The bank also expects just one interest rate reduction to have taken place by the end of 2027, leaving the base rate at 3.75 per cent until the third quarter of next year.
“I would say that the profitability of banks is an incredibly important component of a successful economy,” Chalmers said. “We’ve seen over £6bn lending over the course of this quarter. The only reason we’re able to do that lending is because we’re a profitable, successful institution that’s in the economy’s best interests.”
Comparison with other jurisdictions
The comments follow suit with Barclays’ boss CS Venkatakrishnan, who warned on Tuesday that “banks in the UK are more highly taxed than they are in any other major jurisdiction.” He pointed to the sector’s 46 per cent rate in the UK, compared to Europe ranging between 29 per cent to 40 per cent and the US’ around 20 per cent. Banks in the UK are subject to a sector-specific levy that sits on top of corporation tax as well as VAT, property taxes, national insurance and other taxes levied on businesses. The surcharge stands at three per cent, after being lowered from eight per cent under the Conservative government.
Reeves opted not to slap a tax on the banks in her last Budget, despite lobbying efforts from opposition benches, think tanks and even the Labour party’s own former Deputy Prime Minister Angela Rayner, who is tipped to take the helm after Starmer.
