UBS warns bank tax would raise mortgage rates and deter investment

Analysts at UBS have warned that a proposed increase in taxes on the banking sector would drive up mortgage rates and reduce savings returns, thereby exacerbating the cost of living crisis. The investment bank argues that lenders would pass on the higher tax burden to customers, undermining the Labour government’s stated aim of providing households with greater financial breathing room. This assessment comes as Chancellor John Healey is reported to be considering a significant rise in the surcharge on bank profits, a move that has already triggered a sell-off in major UK banking stocks.

The average advertised mortgage rate in the United Kingdom has already climbed from 4.9 per cent to 5.88 per cent following the outbreak of war in Iran, according to data from Moneyfacts. UBS analyst Jason Napier cautioned that further tax increases would act as an input cost for banks, resulting in marginally more expensive loans and less remunerative deposits. He added that such measures are likely to generate less revenue than required to meaningfully impact public spending or the budget deficit, while simultaneously disincentivising inward investment. The warning aligns with earlier comments from Jamie Dimon, chief executive of JP Morgan, who suggested the bank could withdraw investment from the UK if the government adopts a hostile stance towards the financial sector.

Mr Healey is reportedly considering raising the surcharge on bank profits above the £100 million threshold from 3 per cent to 8 per cent. UBS estimates that even a modest increase to 6 per cent would cost banks up to 4 per cent of their profits. NatWest is expected to be the most adversely affected institution, facing an annual hit of £263 million under a 6 per cent rate. Shares in Lloyds Banking Group and NatWest fell by more than 2 per cent on Friday, making them the worst performers on the FTSE 100 index, although the broader market remained resilient. The FTSE 100 edged up 0.1 per cent, on track for its best weekly performance since April, while the FTSE 250 rose 0.5 per cent.

Other market participants have echoed concerns about the potential impact on competitiveness and investment. Gary Greenwood of Shore Capital noted that a rise to 8 per cent would reduce earnings at Lloyds and NatWest by around 6 per cent, compared with a 2 per cent hit for Barclays and a 1 per cent reduction for HSBC. He suggested that if the profit allowance were increased to £500 million, smaller specialist lenders and fintechs might be relatively better positioned than the high street banks. Miles Celic, chief executive of TheCityUK, warned that increasing sector-specific taxes would send a negative signal to investors, particularly as other jurisdictions reduce corporate taxation to enhance competitiveness. He argued that such a move could damage the UK’s attractiveness and fail to generate the expected tax receipts if capital and business relocate elsewhere.

The Confederation of British Industry has also urged the Chancellor to avoid measures that undermine competitiveness. Louise Hellem, the CBI’s chief economist, stated that the financial services sector is vital for driving investment and innovation, and that the budget should create a predictable environment that supports growth rather than weakening incentives to invest. Similarly, Neil Birrell of Premier Miton warned that additional taxes would put UK growth at risk, with international banks likely to seek alternative locations. He emphasised that higher tax rates do not necessarily lead to increased revenue and could jeopardise jobs. The warnings come as the pound sterling continues to strengthen, hitting its highest level against the dollar in over three weeks, supported by resilient economic data and expectations that the Bank of England has room to manage interest rates without further pressuring the economy.