It looks like UK banks may get a reprieve from the Chancellor in the upcoming Budget, on 26 November, after fears that the sector was ripe for a fresh tax grab.
Soaring profits at the UK’s largest lenders thanks to higher interest rates combined with a pressing need from the Treasury to raise billions of pounds to fill its fiscal black hole had led to speculation banks were likely to be in the firing line.
However, a report in the Financial Times suggests that British lenders will be spared from further levies. It says the Chancellor, Rachel Reeves, is not minded to press forward with additional bank taxes.
Banks already pay 28% corporation tax, which is higher than the standard 25% for other similarly sized businesses. In addition, banks pay a balance sheet levy of up to 0.1% of their balance sheet.
It has been thought that the Chancellor may increase the 3% bank surcharge on top of the 25% corporate tax rate, or change rules so banks would have to pay tax on the interest received on funds they hold at the Bank of England.
Estimates vary but raising the surcharge to 5%, as had been mooted, would entail a hit of up to 2.5% on profits for the banks, with Lloyds and NatWest the most affected. Changing the way the BoE pays interest on bank deposits is not an easy option, but the government could opt for a model along the lines of the European Central Bank, which requires banks to hold 1% of assets earnings no interest. This could have another ~2% hit to profits next year.
Bank shares rallied on the report with Lloyds and NatWest each gaining over 2% and the FTSE 350 Banks index also climbed about 1.5%.
Whilst it is too early to know for certain what the Chancellor has in store for banks, removing a potential threat of additional taxation has been seen in a positive light. UK bank stocks have enjoyed a very good run lately because of higher interest rates, which boosts net interest income, but economic headwinds from the contractionary fiscal impulse from the Budget – ie tax hikes – could weigh on the outlook for shares even if direct taxation of banks is not increased.
Meanwhile, it’s important to stress that as recently as Monday this week we were reading reports in Bloomberg about how banks were bracing for a tax raid in the Budget, with Treasury sources telling the news provider that banks remain an “easy target” for extra tax revenue.
