UK Banking Executives Expect Tax Raid on Profits in October Budget

UK Banking Executives Expect Tax Raid on Profits in October Budget

Senior UK banking executives expect the chancellor to target bank profits in the October Budget, potentially raising taxes on sector revenues and affecting lending costs. This analysis is based on reported sector performance and discussions around possible policy measures in the upcoming Budget due on 28 October 2026.

Sector's Recent Profit Figures

In the first half of 2026, the largest UK banks collectively earned around £15 billion in profits. This amount represents the net earnings after all expenses, including interest payments to depositors and operational costs. The profits arise from the difference in interest rates charged on loans and paid on deposits. With interest rates having risen, banks have benefited from wider spreads, allowing them to generate higher returns without necessarily expanding lending volumes proportionally. These figures are actual outcomes from the period, not projections or revisions.

Potential Tax Adjustments in the Budget

Executives have indicated that the sector could be subject to additional taxation in the October Budget. Possible changes include restoring the 3% surcharge on corporation tax. This surcharge was previously set at 8% but was reduced alongside an increase in the baseline corporation tax rate to 25%. Restoring the surcharge to 8% would increase the effective tax rate on bank profits by 5 percentage points, potentially raising around £2 billion in annual revenue. Another discussed option is a moratorium on the use of past losses to offset current profits. Banks have used this policy to lower tax bills, particularly Lloyds Banking Group due to losses from earlier crises. A temporary moratorium could generate an estimated £1 billion per year, providing a windfall while being described as more bearable by some executives.

Current Taxes on the Banking Sector

The bank levy and surcharge already contribute £2.6 billion annually to the Treasury. The bank levy is a tax applied to the value of banks' loan portfolios at rates of 0.1% for short-term loans and 0.05% for longer-dated loans, with mortgages excluded from the calculation. This asset-based tax is designed to capture revenue based on the size and activity of bank balance sheets. The surcharge is added to the standard 25% corporation tax rate, creating a combined burden on bank profits. These measures are distinct from general taxes and target the banking industry specifically to ensure its contribution to public finances.

Potential Impacts on Lending and Competitiveness

Higher taxes on bank profits could reduce the amount of money available for lending to businesses and households. Banks, to maintain their own profitability after higher tax payments, might adjust lending practices, such as increasing interest rates or reducing the volume of loans issued. UK Finance has noted that further increases in bank taxes would weaken competitiveness, discourage investment and job creation, and work against the government's ambition to deliver growth in every postcode. These risks highlight the tension between raising revenue for the Treasury and supporting economic activity through lower borrowing costs. For workers and small businesses, this could mean higher loan rates or limited access to credit, affecting their ability to finance purchases or expand operations.

Implications for Households, Businesses, and Trade Partners

For UK households, potential increases in bank taxes could translate into higher mortgage or loan rates, as banks may pass on some of the tax burden through their pricing. This effect would be most noticeable for new borrowers, while existing fixed-rate loans would remain unaffected unless refinanced. The changes could also impact Canadian trade partners reliant on UK finance, as the United Kingdom serves as a key hub for international financial services. Canadian businesses might face higher costs for trade-related financing, and households could see ripple effects through exchange rates and investment flows. Uncertainty remains around the final form of any tax measures, their exact implementation, and how banks will respond in terms of lending decisions. Evidence to watch next includes the detailed Budget proposals due on 28 October 2026, any Treasury statements on tax rates, and market reactions from financial institutions.