Banks are a fair target in UK next tax grab
28/04/2026 10:59
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. By Neil Unmack LONDON, April 28 (Reuters Breakingviews) - Banks may not be able to escape Britain’s next tax grab. Chancellor Rachel Reeves, or her successor, may need to raise duties as the Iran crisis hits government finances. The likes of NatWest NWG.L and Lloyds LLOY.L fit the bill. Bank investors have many reasons to be fearful. Prime Minister Keir Starmer is under pressure amid a scandal involving his appointment of Peter Mandelson as U.S. ambassador despite his links to disgraced financier Jeffrey Epstein, and a likely weak result from upcoming local elections in May. A more left-leaning successor may raise taxes. The Iran crisis will increase pressure on a ropey economy: output may only grow 0.8% this year, far below the 1.4% Reeves assumed in her last budget. On paper, banks are a risky lever to pull. The less profitable they are, the more they may charge borrowers. UK banks are also already well taxed: since 2011 the government has, on top of corporation tax, imposed a levy based on domestic deposits and a surcharge linked to net income. Still, Reeves' financial sector deregulation drive gives her some credibility to get tough without spooking markets. Moreover, the previous Conservative government slashed the surcharge on bank profits at the same time as raising corporation tax. Thus, the combined total of these two plus levies paid by lenders has risen by just 200 million pounds over the last three years, to 11.1 billion pounds, after stripping out employees personal tax and social security contributions, according to Breakingviews calculations and government data. Bank taxes, as a share of overall government receipts, have fallen to 4.3% in 2025 from 5.9% in 2017. The banks needn’t fear a small increase in the bank levy, as has been suggested by Angela Rayner, a potential Starmer successor. The more profitable ones, NatWest, Lloyds and HSBC HSBA.L, are set to boost their returns on tangible equity from an average of 17% to 19% from 2026 to 2028, as per Visible Alpha. That's comfortably above their cost of capital of just over 10%, a fact reflected in their healthy valuations. Even a 5 percentage point increase in the surcharge on profits, bringing it back to its previous peak of 8%, would only trim the sector's net income by 5 percent, on Jefferies numbers. True, the Iran conflict could lead to a recession, and bigger losses, but over time higher inflation will push up rates and returns on lending. Reeves could ease pushback by pledging, for example, to use a tax hike to fund specific energy subsidies during the crisis, thus imposing a natural ceiling and time limit. And any move that helps stabilise government finances would make more extreme outcomes, such as Nigel Farage’s suggestion of slashing Bank of England remuneration reserves, less likely. Higher bank levies could also help the public swallow more controversial reforms, like curbing welfare. Sometimes, even taxes have an upside. Follow @Unmack1 on X. CONTEXT NEWS The International Monetary Fund on April 14 cut its estimate for UK growth to 0.8% in 2026, down from 1.3% before the Iran conflict. Graham Stringer, a member of parliament for Britain’s ruling Labour party on April 23 said Prime Minister Keir Starmer should resign following a scandal over his choice of former US ambassador Peter Mandelson. Fellow Labour MP Jonathan Brash also called for Starmer’s resignation. Angela Rayner, a prominent parliamentarian and potential successor to Starmer, has previously called on Chancellor Rachel Reeves to raise taxes on banks. Rayner suggested Reeves should increase the surcharge on bank profits by 2 percentage points to 5%. UK banks are (mostly) valued above book value https://www.reuters.com/graphics/BRV-BRV/xmvjyygkqpr/chart.png (Editing by Aimee Donnellan; Production by Shrabani Chakraborty) ((For previous columns by the author, Reuters customers can click on UNMACK/neil.unmack@thomsonreuters.com))