UK Temporarily Doubles Bank Levy to 6% as Bank Shares Rise
Key Facts
The UK government has decided to raise the surcharge on banks’ profits from 3% to 6% from 1 January 2027, on a temporary basis, according to live budget coverage citing Chancellor John Healey. The coverage linked the increase to funding household support amid higher energy costs. Healey said, "This measure will be temporary, not permanent." The decision falls short of restoring the levy to 8%, the level in place before it was cut in 2023. Lenders had prepared for the possibility of a return to that rate, according to the same coverage. The difference between the announced increase and the higher scenario was quickly reflected in UK bank shares.
The levy is charged on banks’ profits, with taxable profits calculated on the corporation tax basis before certain deductions are included, according to HM Revenue & Customs. It covers banking companies and building societies subject to UK corporation tax. The base therefore extends beyond banks to include building societies that meet the eligibility criteria, while the charge is tied to profits rather than total revenue. HMRC said the levy "applies to all banking companies and building societies liable to UK corporation tax." This definition places the increase within an existing system for taxing the sector, rather than making it a general charge on all financial activity.
The government collected 1.2 billion pounds sterling from the bank levy in fiscal year 2025-2026, an increase of 0.2 billion pounds, or 20.1%, from the previous year, according to HMRC data. Other tax receipts from the sector in the same fiscal year included Pay As You Earn income tax, corporation tax, the bank levy and the banking surcharge; these items totaled 39.1 billion pounds. The total was 3.1 billion pounds, or 8.5%, higher than in the previous fiscal year. The two figures show the levy’s contribution on its own within broader tax receipts linked to banks and their employees. They provide financial context for the decision, while the available coverage did not specify expected proceeds from the new increase once it takes effect.
The announced 6% rate fell short of expectations for a return to 8%, the level from which the levy was cut in 2023, according to budget coverage. An EL7 report the previous day had said the prospect of raising it to 8% was linked to an estimated 6% decline in NatWest’s profits. After the announcement, NatWest shares rose about 4%, while Lloyds shares gained 3.75%, according to the live coverage. The coverage linked the gains to investor relief that the increase was smaller than the scenario they had feared. An EL7 report on 28 October also said Lloyds shares rose 4.2% after a tax announcement it described as lighter than previous concerns. The figures show a positive market reaction after the prospect of a return to the higher rate receded, with the reported change in Lloyds shares differing between the two reports.
The budget was preceded by debate over options for raising revenue. The International Monetary Fund said the chancellor should prioritize property tax reform, broadening the sales tax base and better targeting welfare spending before raising taxes on banks or workers. Healey, meanwhile, said before the budget that he wanted to give businesses and households "some breathing space," while reaffirming the commitment to fiscal rules and reducing the deficit. The debate coincided with UK inflation reaching 3.5% in October, its highest level in about a year, according to the Associated Press. The agency pointed to expectations that inflation would rise in the following months as fuel prices climbed in connection with the Iran war. An EL7 report on 28 October also said UK debt had exceeded 3 trillion pounds amid funding pressures ahead of the budget. The new rate is due to take effect on 1 January 2027, in what the government described as a temporary measure.