The Chancellor John Healey is planning to increase taxes on banks in this month’s Budget – sending a message to successful sectors across the economy that the Treasury sees them as cash cows. It’s a shame that he doesn’t see our financial sector as a vehicle for growth instead. Gerard Lyons wrote for CapX about why the bank tax is a bad idea and what Healey should do instead – it’s my piece of the week. Find out more below.
We also had Matthew Elliott writing against the risk of a rise to capital gains tax. Senior Labour figures have proposed equalising it with income tax. This would be a terrible idea: the Government’s own modelling shows a 10 percentage point rise in CGT could lose billions of pounds in revenue.
Daniel Herring, Head of Economic and Fiscal Policy for the Centre for Policy Studies, looked at the IMF’s rather generous predictions for the UK economy. It increased its expectations for economic growth in 2026 and predicted that the UK would see the biggest deficit reduction among the G7. Predictions are all well and good, but these are based on a fiscal fiction: Rachel Reeves promised spending cuts toward the end of this parliament that Labour’s free-spending backbenchers will never approve.
Meanwhile, Alys Denby reminded us why blocking Heathrow expansion is bad for growth, and why Andy Burnham’s equivocation on the third runway is no surprise from an anti-London Prime Minister. The airport is not just a thriving passenger hub but also the UK’s most valuable port. Adding another runway could create tens of thousands of jobs and bring in £40 billion in benefits.
No government can claim to be pro-growth and internationally oriented while deliberately constraining its most vital transport hub
Elsewhere, Joseph Dinnage argued for freezing the National Living Wage for five years, and Harry Phibbs railed against Burnham’s dreams of rejoining the EU.
In James Ball’s latest edition of Nimby Watch, he visited a Sevenoaks golf course that local pressure has left derelict for nine years – and where even ‘grey belt’ designation hasn’t been enough to unlock its redevelopment into new homes. Mani Basharzad shared his excitement at the latest winners of the Nobel Prize in Economics.
On The Capitalist this week, CapX’s editor Marc Sidwell sat down with Robert Tombs, emeritus professor of French history at Cambridge and author of The English and Their History, about the new book he has written with Nigel Biggar: Our Islands’ Story. It’s out this week. They discussed why the history of empire and slavery has come to crowd out everything else, why Britain’s part in abolition gets so little attention and what the empire did for global trade. They also covered why Tombs thinks the institutions are now too captured for the free market of ideas to fix things on its own.
Oscar Gill-Lewis
Deputy Editor, CapX
Healey’s tax raid on banks is bad for growth
Gerard Lyons
Should banks be taxed more? That seems to be one of the routes that the Chancellor will go down in the Budget, according to news reports from Bangkok, where he attended the annual meetings of the International Monetary Fund and World Bank.
Thousands of bankers were in attendance and he was one of the only finance ministers sending such a message of another tax raid.
For an industry like banking that is globally competitive, and for a country like the UK that has the world’s second largest financial centre and the one with the largest number of banks, it is a brave decision to take.
The tax that looks set to be raised is the bank surcharge. This was cut from 8% to 3% in April 2023. The suggestion is to raise it back to 8%. Is it worth the hassle? Banks paid £1.2 billion in bank surcharge in 2025/26. A hike to 8% is estimated to raise around an additional £2.2 billion. The additional money is not insignificant but, for a Government raising over £1 trillion in tax, it is a small proportion. Yet raising it risks sending a clear signal that successful sectors are cash cows. That is not a good message to send.
Banks pay about one-tenth of corporation tax. UK Finance claims that their total tax contribution, including taxes borne by their workers, was £43.3 billion in 2024/25
In addition to the surcharge, banks pay corporation tax at 25%, which rose as the surcharge was cut. They also pay £1.4 billion a year through a bank levy, an annual tax levied on different components of their balance sheet. Then, on top of this, they pay the same taxes as others, such as National Insurance.
Roughly speaking, banks pay about one-tenth of corporation tax. UK Finance claims that their total tax contribution, including taxes borne by their workers, was £43.3 billion in 2024/25. This is already significant.
This higher tax policy would likely lead to banks passing on costs to consumers. It also speaks to not knowing how to encourage economic growth and to not taking the tough political decisions on controlling public spending.
While I am not a supporter of banks paying more tax, I am in favour of a shift in how much interest is paid to banks on their reserves at the Bank of England.
In ‘Breaking the Cycle’, I argued for the Bank of England to shift from paying Bank Rate on all bank reserves and instead move to a tiered system, which is used elsewhere. Although this would reduce how much banks receive, it is materially different to a levy on their balance sheets or a surcharge on their profits. It is more a case of reducing what is in effect a subsidy from the taxpayer to the banks, and one which looks set to increase if the Bank Rate rises. Paying Bank Rate on all reserves is a policy choice, not a necessity for monetary control or financial stability.
Moving to a tiered system could still allow effective monetary control over interest rates and save the Exchequer significant amounts; it could be over £10 billion, depending on the approach. This would be far more than would be raised by a higher bank surcharge.
While the Iran war this year triggered volatility in financial markets there was remarkable financial stability. This welcome development was in part because banks were well capitalised and liquid. This was a global, not just a UK phenomenon.
Banks’ profits and their ability to benefit from higher policy rates through wider net interest margins are feeding pressure for higher taxes. But their solid financial position merits a shift in the conversation, away from yet higher tax rates to whether the sector is pulling its weight in the UK economy. Given its strong capital and liquidity positions, should it be lending more?
There is another part of the equation, although this is not under the Chancellor’s remit: the argument to remove unnecessary capital burdens where evidence supports the case for doing so.
Easing unnecessary capital requirements, where justified, should lessen their cost of lending. This is not the only explanation for their lending behaviour but it might help.
Lower capital burdens are not, and should not be seen as, part of a bargaining process that compensates for higher taxes. The latter should be based on many fiscal factors and are set by the Chancellor. In contrast, capital requirements are determined by risk and financial stability issues and fall under the regulators.
There are international norms that the UK helped set and which will stay. It is the unnecessary or excessive requirements that might be reduced. One example to examine is the countercyclical capital buffer, set by the Financial Policy Committee. It is 2%. In Germany it is 0.75%. In France it is 1%. It is extra capital required to be held against relevant risk-weighted assets. These comparisons warrant scrutiny, although differences in the wider capital frameworks also matter.
Banks should lend more. The financing gap facing smaller businesses was identified in 1931 by the Macmillan Committee. It has remained a perennial issue. This March, the British Business Bank pointed out that challenger and specialist banks account for 60% of gross bank lending to small and medium-sized enterprises (SME), up from 39% in 2012. That would imply £41 billion out of £68 billion. In contrast, the share of the big five banks was only £27 billion, or 40%.
Meanwhile, the latest lending data from August highlights that the annual growth rate of lending to large firms from banks and building societies continues to outstrip that to SMEs, at 8.9% against 4.6%. The rate charged on new loans to SMEs is also far higher, at 6.63% compared with 5.57% for non-financial companies overall. Differences in risk and the cost of providing smaller loans might explain this. Even so, the message is that SME bank lending is growing more slowly and is more costly. The aim should be to encourage banks to increase their lending to this sector.
There is a need to ensure that the City is internationally competitive and also serves the best interests of the UK economy. The approach to banks is central to that. There are many moving parts: taxation, reserve remuneration, capital requirements and the supply and cost of lending. They need to be considered together, not in isolation. As with many aspects of the UK economy, higher taxes are not the right answer.
And if you want more…
– Is Britain a greater credit risk than Greece? (Lee Gregory Peck)
– Britain’s knowledge workers are being taxed away (Nima Sanandaji)
– Healey is about to bill you for Whitehall’s waste (Damian Pudner)
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