UK bank tax is more a case of how than if

Lloyds Banking

12/10/2026 12:12

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Neil Unmack
LONDON, Oct 12 (Reuters Breakingviews) - British lenders seem to be in the firing line once again. It's hardly surprising: Lloyds Banking Group LLOY.L, NatWest NWG.L, HSBC HSBA.L, 0005.HK and others are pumping out handsome returns while the public purse is stretched. UK finance minister John Healey last week warned the country's biggest banks that he faces a “challenging fiscal picture”, according to the Financial Times, raising fears of new taxes. There are ways to sugar the pill.
The Iran war has pushed up government borrowing costs, making an already grim fiscal picture even worse for Healey and new Prime Minister Andy Burnham. Banks, which benefit from higher rates, are doing relatively well. Analysts' forecasts for net interest income at Lloyds and NatWest, two of the more UK-focused of the group, have risen by roughly £500 million ($662 million) in total since the days before the Iran war. Extrapolated across the sector, that implies a greater than £1 billion boost.
The broader cohort of Lloyds, Barclays BARC.L, HSBC and NatWest will on average crank out a 17% return on tangible equity this year, per Visible Alpha consensus data. That number is historically high and far exceeds their probable 10% cost of equity, suggesting that an extra tax would not impair their access to capital. And while lenders are already subject to a range of special charges, the takings from these extra taxes have come down in recent years. The bank levy and bank surcharge bought in £2.3 billion in the 2024-2025 tax year, against £3.9 billion two years earlier.
Yet higher rates have downsides for lenders too, including slower credit growth. Jefferies analysts estimate that a 0.5 percentage point upwards shift in the yield curve, consistent with UK moves since August, could over time shrink bank loan balances by 2-3 percentage points versus the counterfactual scenario of steady rates. And while brokers' bank profit forecasts have risen since February, the lenders' price-earnings ratios have fallen slightly, which means that investors do not expect a lasting windfall.
Finally, bank CEOs could argue that they already have a harder time than many international rivals. Britain’s lenders labour under some of the most complex capital rules in the G7, and are bound by "ring-fence" rules that separate retail operations from investment banking. Piling yet more pain on top, in the form of new windfall taxes, could hamper economic growth and curb Britain's status as a financial hub. 
This all suggests a possible halfway-house solution: some modest extra bank tax in return for an easier ride elsewhere. What form the new levies take is up for debate: former finance minister Rachel Reeves whacked up social security charges, which gobble up a larger share of bank profits in Britain than in Germany, the US, Ireland or the Netherlands. But she also leaned on regulators to keep competitiveness in mind. The Bank of England has responded, for example, by tweaking minimum leverage requirements. Burnham could throw his weight behind deeper reforms, such as tweaking the rules that penalise software investment by deducting technology assets from equity capital. More bank taxes are probably coming, but they need not be a disaster for the sector.
($1 = 0.7556 pounds)
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CONTEXT NEWS
UK Prime Minister Andy Burnham faces his first budget on October 28, as the Iran war batters UK state finances.
Britain’s so-called fiscal headroom, which measures the government's financial cushion over and above meeting a budget target to balance day to day spending and receipts, is now just £12 billion, down by roughly half from earlier this year, the Financial Times reported based on a survey of economists.
UK finance minister John Healey held a meeting with bank executives on October 6, during which he outlined the country’s challenging fiscal picture, but did not give any guidance on whether UK lenders such as NatWest or Barclays would face higher sector levies, the Financial Times reported.

(Editing by Liam Proud; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on UNMACK/neil.unmack@thomsonreuters.com))