Banking shares fall on reports of planned tax increase

Shares in major British banks declined in early trading following reports that Chancellor John Healey is preparing to raise taxes on the financial sector. The move is expected to be announced during the Budget scheduled for the end of the month. Market sentiment turned negative as investors reacted to the prospect of increased fiscal levies on lenders, which have recently reported substantial profits.

Natwest shares fell by two per cent to 660.40p, while Lloyds Banking Group dropped approximately 2.5 per cent to 103.40p. Barclays also saw a decline, sliding 0.4 per cent to 430.50p at the market open. These movements reflect broader concerns within the City regarding the potential financial impact of new government measures on the banking industry.

The Chancellor has faced sustained pressure from left-wing Labour MPs and trade unions to increase taxation on the sector. According to reports from The Guardian, Healey has decided to target banks to help balance the public finances. One option under consideration is an increase to the banking surcharge, which is levied on top of corporation tax. This surcharge was previously reduced from eight per cent to three per cent under former Chancellor Jeremy Hunt in 2023. Reversing that reduction is understood to be a possibility, a move that could generate approximately £2bn in annual revenue.

Some advocates for higher taxation have called for a windfall tax on lender profits. Positive Money, an advocacy group, estimates that such a measure could raise £19bn from Natwest, Lloyds, Barclays and HSBC alone. In remarks made in Bangkok during the IMF summit, Healey acknowledged the central role of banks in the national economy. He stated that while banks are often viewed as distant institutions, they are integral to the country’s economic fabric and future prospects. He confirmed that decisions regarding the sector would be taken in the upcoming Budget.

In an interview with Bloomberg Television, Healey described banks as part of the jewel in the British economic crown. However, the prospect of a tax increase has drawn sharp criticism from industry leaders. Figures from PwC indicate that total taxes on UK banks amount to 46 per cent of profits, a rate higher than in Amsterdam, Frankfurt, Dublin and New York. A letter from the chiefs of TheCityUK, the CBI and UK Finance warned that a higher tax burden could lead to capital and businesses moving elsewhere, potentially reducing overall tax receipts.

Political opposition has also emerged. Conservative leader Kemi Badenoch warned against a raid on the financial services sector, arguing it would stifle growth. Shadow Chancellor Andrew Griffith echoed these sentiments, stating that Labour should support wealth creators rather than making their lives harder. Last week, the chief executives of HSBC, Lloyds, NatWest, Barclays and Santander met with Healey. The Chancellor remained tight-lipped on specific fiscal policies but noted the challenging fiscal landscape. Economists have suggested that the Chancellor’s available headroom has decreased significantly due to rising borrowing costs linked to inflationary pressures from the US-Iran conflict. A Treasury spokesperson declined to comment on speculation, stating that tax decisions are for the Chancellor to outline at fiscal events.