Labour is facing fresh accusations of undermining its own economic growth ambitions after reports emerged that Chancellor John Healey is preparing to impose billions of pounds in additional taxes on Britain’s banks, despite publicly praising the industry as one of the country’s most valuable economic assets.
With the Budget scheduled for 28 October, senior banking executives believe the Treasury is preparing to target their profits as the Government seeks to strengthen the public finances amid rising borrowing costs and mounting pressure on its spending plans.
According to reporting by the BBC and Telegraph, one option under consideration would see the Government reverse a previous Conservative reduction in the corporation tax surcharge imposed on banks, potentially raising more than £2 billion a year.
The prospect has already unsettled investors, with shares in major British lenders falling in early trading on Friday as markets reacted to reports of another potential tax increase.
The Telegraph reported that shares in NatWest and Lloyds Banking Group were both down more than two per cent in early trading on the London Stock Exchange.
The reports have raised an uncomfortable question for Labour: how can a Government repeatedly promising to make Britain more competitive and attractive to international investors justify imposing additional taxes on one of the country’s most important industries?
The contradiction is particularly striking given the Chancellor’s own remarks during a visit to Bangkok for meetings involving the International Monetary Fund.
Speaking on Thursday, Healey described banks as an important contributor to the British economy and part of the country’s economic crown. Yet reports suggest the same industry is firmly in the Treasury’s sights for another tax increase.
British banks already face additional taxes
Banks operating in Britain already pay considerably more than the standard rate of corporation tax.
Alongside the headline corporation tax rate of 25 per cent, major banks and building societies pay an additional three per cent surcharge on qualifying profits, taking the combined headline rate to 28 per cent. They are also subject to a separate bank levy calculated on certain liabilities and equity held on their balance sheets.
According to figures reported by the BBC, the banking sector contributed nearly £40 billion to the Exchequer last year when taxes paid by employees are included.
The bank levy generated approximately £1.4 billion, while the corporation tax surcharge raised a further £1.2 billion. The surcharge was previously set at eight per cent but was reduced to three per cent under the Conservatives as the main corporation tax rate increased from 19 to 25 per cent.
Reversing that reduction would potentially push the combined headline corporation tax rate on bank profits to 33 per cent. Estimates suggest such a move could generate approximately £2 billion annually, although the eventual revenue would depend on bank profitability and the precise design of any measure.
The Government has not confirmed whether it intends to increase the surcharge, change the bank levy or pursue another form of taxation.
Industry warns Labour’s plans could threaten jobs and investment
The banking industry has responded with warnings that additional taxation could undermine Britain’s competitiveness at a time when the Government insists that private investment is essential to economic recovery.
UK Finance, the trade body representing the banking and financial services sector, warned that further increases would damage competitiveness, deter investment and employment, and contradict Labour’s stated ambition to spread economic growth across the country. The concern extends beyond the City of London.
Banks provide finance to businesses, mortgages to households and investment capital to companies seeking to expand.
Industry representatives argue that imposing additional costs on lenders risks reducing the resources available to support those activities. That does not mean every increase in banking taxation would automatically result in higher mortgage rates or reduced lending.
Such outcomes would depend on market conditions and how individual banks responded. Nevertheless, the prospect of additional taxation has prompted concern among executives who believe Britain already imposes a substantial burden on its financial services sector.
Jamie Dimon, chief executive of American banking giant JPMorgan Chase, has previously warned that Britain’s banking taxes are among the highest internationally and that further increases could discourage investment.
For Labour, which has repeatedly presented economic growth as its overriding priority, those warnings pose a serious political challenge.
Bank profits fuel calls for higher taxes
Supporters of additional taxation argue that Britain’s banks have benefited substantially from higher interest rates, which can increase the difference between what lenders charge borrowers and what they pay savers.
The country’s four largest banking groups collectively reported approximately £15 billion in profits during the first six months of 2026. Trade unions argue that these profits justify asking the sector to contribute more towards the public finances.
Trades Union Congress general secretary Paul Nowak has supported the prospect of higher banking taxes, arguing that banks should pay a fairer share while recognising the importance of maintaining a successful financial services industry.
Former banker and author Sir Philip Augar has also suggested there is scope for a moderate increase in taxation, potentially raising up to £3 billion annually. He pointed to the industry’s history of receiving taxpayer support during financial crises and argued that banks should not expect special treatment during periods of strong profitability. These arguments will undoubtedly resonate with households struggling with the cost of living.
However, critics of Labour’s approach question whether the Government has adequately considered the longer-term consequences of repeatedly turning to additional taxation rather than measures designed to encourage investment, productivity and economic expansion.
Another option could target historic banking losses
The Treasury is also understood to have considered restricting banks’ ability to offset historic losses against current profits when calculating corporation tax.
Under existing rules, banks can use certain losses carried forward from previous years to reduce their taxable profits, subject to statutory restrictions.
Lloyds Banking Group has been among the institutions benefiting from losses accumulated during the financial crisis. Temporarily restricting this arrangement has reportedly been discussed as an alternative to raising the surcharge.
According to the BBC, such a measure could raise approximately £1 billion annually. However, the proposal could prove controversial because it would affect banks with substantial historic losses differently from those without them, potentially placing some British lenders at a disadvantage compared with international competitors.
Labour faces growing pressure over Britain’s public finances
The banking tax reports come as Healey attempts to rebuild the Treasury’s financial headroom ahead of the Budget.
Britain’s public finances have been affected by higher borrowing costs and the economic consequences of the conflict involving Iran, adding to the difficulty of meeting the Government’s fiscal rules. The Treasury argues that maintaining fiscal discipline and protecting the economy against international shocks are essential priorities.
But Labour’s critics argue that the Government risks becoming increasingly dependent on extracting more revenue from businesses at precisely the moment Britain needs them to invest, recruit and expand. The political difficulty for Healey is clear. Having praised banks as vital to Britain’s prosperity, he must now explain how taking billions more from the same industry would advance his stated objective of strengthening the economy.
There is a legitimate debate about whether highly profitable banks should contribute more to the public finances, particularly given the support the sector received during the financial crisis. But there is an equally legitimate question about how much additional taxation Britain’s financial services industry can absorb before investment and international competitiveness begin to suffer.
For a Labour Government that came to office promising growth, the danger is that another Budget dominated by tax increases will reinforce the perception that its answer to Britain’s economic problems is to keep reaching for the taxpayer rather than creating the conditions for greater prosperity.
The Chancellor will reveal his decisions on 28 October. Until then, Britain’s banks, investors and businesses face another period of uncertainty over how much more Labour intends to take.
