Potential UK Bank Levy Increase to 8% Threatens 6% Drop in Profits
Key Facts
UK banks face the prospect of an increase in the surcharge on their profits from 3% to 8%, under a proposal that has not been confirmed, which could reduce profits by about 6%, according to Richard Hunter of Interactive Investor. Hunter said NatWest and Lloyds were likely to be the most exposed among domestic banks. The concerns come ahead of the government’s budget scheduled for 28 October, amid debate over the impact of any tax increase on the sector. HMRC data show that the levy is paid alongside corporation tax and applies to banks and building societies subject to it. The Treasury has not confirmed the increase, saying tax decisions are announced by the Chancellor at fiscal events.
Banks’ sensitivity to the possibility stems from the surcharge being part of their tax liabilities; its rate and the group allowance have changed before. The levy stood at 8% until April 2023, when it was cut to 3%, alongside an increase in the allowance from £25 million to £100 million. The scenario under discussion would return the rate to its previous level, but the revised allowance criteria remain part of the current tax framework, according to HMRC data. The levy does not replace corporation tax; it is added to that liability. Health Secretary John Healey said banks were “tied to the economic fabric of this country and its future prospects.”
UK Finance warned that further increases in taxes on banks could “undermine competitiveness and deter investment and job creation,” arguing that this would run counter to the government’s growth objective. The position comes as the four largest UK banks together reported about £15 billion in pre-tax profits in the first half of the year, according to a Reuters report. Concerns are focused on banks with domestic businesses, with Hunter’s estimate placing NatWest and Lloyds among those most exposed to any increase. But the potential 6% reduction in profits remains an estimate conditional on the tax change taking place. It is not a realized outcome or an official sector forecast.
Bank shares fell in morning trading on 16 October, when NatWest dropped about 2% to 660.40 pence, Lloyds fell about 2.5% to 103.40 pence, and Barclays declined 0.4% to 430.50 pence, according to City A.M. EL7 data show NatWest shares closed at 17.09 on 26 October, with no currency specified. The data do not establish that the share move that day was linked to tax speculation. In separate economic news, UK annual consumer price inflation rose to 3.5% in September from 3.1% in August. The figure was above economists’ forecast of 3.4% and the Bank of England’s July forecast of 3.0%.
Attention is turning to the budget on 28 October, when the Chancellor will set out fiscal decisions, but open sources do not confirm that an increase in the levy will be included. A Treasury spokesperson also said tax decisions were “a matter for the Chancellor to announce at fiscal events,” and that the department does not usually comment on rumours, speculation or proposals. Budget week coincides with NatWest’s expected third-quarter results, which were forecast to show operating pre-tax profit of £2.2 billion, unchanged year on year. The day after the budget, the Bank of England plans to publish the September edition of its Money and Credit data on 29 October. The Bank’s calendar includes this statistical release, with the source making no link to the impact of the tax proposal.