Reeves Confronts Renewed Demands to Ease Banking Tax Burden
Chancellor Rachel Reeves is confronting intensified pressure to implement tax reductions for the banking sector following explosive new research that exposes the severe competitive disadvantages facing UK lenders. Despite avoiding a fresh tax raid in the Autumn Budget, a comprehensive report from the Association for Financial Markets (AFME) and KPMG is urging the Chancellor to take more aggressive action to support the financial industry.
Banking Tax Burden Reaches Critical Levels
The AFME analysis reveals that while sector-specific taxes on banks might have political justification, the financial burden ultimately transfers to banking services and customers, resulting in increased costs throughout the broader economy. In the 2024 to 2025 financial year, UK banks contributed approximately £35.2 billion in total taxes according to HMRC statistics, matching pre-financial crisis levels despite significant economic changes.
The total tax rate imposed on UK lenders climbed to 46.4 percent in the most recent year, up from 45.8 percent, largely due to Reeves' employers national insurance contributions. City banks currently face a complex web of taxation including a sector-specific levy, a profit surcharge atop corporation tax, VAT, property taxes, national insurance, and various other business levies.
Complex Tax Structure Under Scrutiny
The bank levy functions as a tax on a bank's debts and liabilities, designed to encourage safer balance sheets with higher rates for short-term debt and lower rates for more stable long-term obligations. Meanwhile, the surcharge imposes an additional three percent tax on profits beyond the standard 25 percent corporation tax rate.
The AFME has launched a vigorous lobbying campaign urging the government to commit to no further bank tax increases for the remainder of the parliament and to refrain from imposing any new levies. The organization specifically advocates for phasing out the bank levy entirely to align the tax regime with the broader economy.
The group emphasized that "The Government should look to simplify tax rules where possible, with particular reference to banks compliance and reporting requirements," highlighting the administrative burden created by the current complex system.
Political Landscape Creates Uncertainty
In the lead-up to the Autumn Budget, speculation mounted about whether banks would be targeted as Reeves sought to generate additional revenue. The Chancellor faced lobbying from think tanks, opposition politicians, and even former deputy Prime Minister Angela Rayner to increase banking industry taxes.
The left-leaning Institute for Public Policy Research (IPPR) suggested Reeves could raise up to £8 billion annually through a new levy on bank profits from quantitative easing. However, Reeves ultimately avoided this approach, and within 48 hours of the budget announcement, several British banks unveiled substantial investment commitments in the UK.
At a November London banking conference, City minister Lucy Rigby declared that banks deserved removal from the "naughty step" as the government considered relaxing some post-financial crisis regulations.
Future Political Risks for Banking Sector
Analysts have identified political instability as a significant risk factor for the banking industry moving forward, particularly as Prime Minister Keir Starmer's leadership faces mounting pressure. A potential change in leadership could open the door to a left-wing successor with less favorable views toward the banking industry, which Moody's analysts warned could create an "uncomfortable" environment for the sector.
Meanwhile, Reform UK leader Nigel Farage has been unequivocal about his intention to impose additional taxes on the banking industry. Speaking at the World Economic Forum in Davos earlier this year, Farage stated: "This will be tough for banks to accept but I am sorry – the drain on public finances is just too great."
He framed his proposed measure not as a direct tax but rather as ending banks' access to "free money" through quantitative easing earnings. This political landscape creates additional uncertainty for an industry already grappling with one of the highest tax burdens among developed economies.
