Chancellor John Healey’s decision to implement a 15-month, time-limited bank tax hike has sparked immediate pushback from financial institutions and industry groups. Lenders and market analysts remain deeply skeptical of the government’s promise to roll back the levy, pointing to a long history of temporary measures becoming permanent fixtures in the UK tax code.
Why doesn’t the City believe the tax hike is temporary?
Few things in British politics have proved to be as permanent as a temporary tax. When the Conservatives introduced the 25 per cent energy profits levy in 2022, it featured a strict December 2025 sunset clause. Six months later, that deadline slipped to 2028. By 2024, under a Labour government, the measure was extended to 2030 and hiked to 35 per cent.
This Whitehall precedent also applies to income tax, which arrived in 1842 as an emergency three-year measure and survives nearly two centuries later on rolling annual renewals. Consequently, the City has switched into defensive mode following the Chancellor’s hike to the banking surcharge. While the Budget document insisted there would be legislation for the time-limited period and that it would “not be extended,” it has done little to reassure the sector.
The major Budget questions facing John Healey in four charts https://t.co/m6H8SI57Tz
“We hope this tax rise is limited,” William Chalmers, finance boss of Lloyds Banking Group, said, adding that the measure would be “unhelpful” for the government’s growth ambitions.
Writing in City AM, UK Finance chief David Postings noted that history gives the sector reason to be cautious. He added that taxes introduced in response to temporary pressures have a habit of lasting longer than originally intended, and that the government should look to reduce the burden over the long term rather than increase it.
“This is not an abstract concern,” Postings wrote. “International firms decide where to deploy capital and create jobs. A stable and predictable tax regime is one important factor in those decisions.”
How much will the surcharge cost lenders?
The increase amounts to a £1.5bn tax grab that will take surcharge receipts to £2.4bn for the 2027–2028 period, up from £1.2bn in the last year. Based on RBC research, Lloyds, NatWest, and Nationwide stand to bear the greatest impact from the higher surcharge. Meanwhile, Jefferies estimates the surcharge costs around 0.5 per cent of market value due to its temporary basis.
“If this is genuinely 15-month time-limited, the capital impact at around 0.5 per cent of market value is more relevant,” Jonathan Pierce, analyst at Jefferies, said. “Granted, investors may not believe this is the case.”
Benjamin Toms of RBC added that the market will be skeptical of the temporary nature of these changes based on experiences elsewhere in Europe, such as Spain. For 2023 and 2024, the Spanish authorities put in place a 4.8 per cent charge targeting banks’ fee income and net interest earnings, bringing in peaks of €1.7bn, prior to the country’s administration prolonging the measure until 2027 and swapping the uniform percentage for a revenue-based sliding scale.
Ahead of the Budget, the UK’s outsized tax rate for lenders already stood out. One banking source characterized the increase as an “extra tax on top of an extra tax,” while another reported “disappointment” across the industry, even though many firms had entered the day bracing for worse.
What is funding the energy support package?
Healey framed the tax move as a mechanism to help fund an energy support package. This includes a flagship policy of paying £100 to 20m households to help with bills this winter following the price surge stemming from the US-Iran war.
“I don’t see an obvious linkage between energy prices and bank taxes,” Chalmers said.
Will Howlett, financials analyst at Quilter Cheviot, pointed out that the energy windfall tax continues to operate today, adding that banks will be very wary of this. He noted that the time limit should be taken with a “pinch of salt” because the geopolitical situation shows no sign of abating. According to Howlett, there will need to be a material change to the conflict in the Middle East for the better before the government feels it can return to previous tax levels.
Before the Budget, banks were on the back foot after rumors of a windfall tax ran rampant, with many bracing for a reversal of Jeremy Hunt’s 2023 bank tax cut that would take the surcharge back to eight per cent. The Trade Union Congress had even suggested raising the surcharge to 16 per cent to capitalize on the booming half-year profits of top lenders.
Those rumors paved the way for positive share movement when the government announced the surcharge would instead move to six per cent for a temporary period. However, stocks moderated through the session and finished only moderately up compared to the highs reached in the aftermath of Healey’s announcement.
“A ‘do no harm’ Budget was our test. It is one that the Chancellor has not quite met,” Miles Celic, chief executive of TheCityUK, told City AM diplomatically. “The bank tax’s temporary nature matters, but only if the Chancellor honours his commitment to removing the increase after 15 months.”
