The City was left reeling on Friday following reports that John Healey was drawing up plans to tax banks in the forthcoming Budget.
Industry heavyweights across the UK have fired warning shots as Healey weighs up different options to target the banking industry with a hefty cash raid.
One City figure told City AM a tax on banks would be a “retrograde step”. They added that while there didn’t appear to be a “hostile agenda” the tax would not fit with recent comments made by the Chancellor.
On Thursday at the IMF summit, Healey described banks as “part of the jewel in the British economic crown”.
When pressed on taxing the sector he said banks were “hardwired into the economic fabric of this country” but added broadly there were “decisions to take in the Budget”.
The remarks have left the City splitting hairs following a report from The Guardian less than 24 hours after supportive Healey’s comments that the Treasury was drawing up plans to hike bank taxes.
One industry source said it was “very surprising” to hear Healey’s comments and “finish the day” with news the sector was set to be targeted.
But another banking source pushed back that any decisions had been made and claimed negotiations over capital allocation and spending cuts between government departments would still be ongoing, leaving tax policy up for speculation.
They added “even the least cynical of people might be a tad suspicious”.
Banking bosses and industry leaders will now commence scenario analysis regarding possible outcomes of a punishing tax raid at the Budget, sources said.
‘A tax on investment’
Will Howlett, financials analyst at Quilter Cheviot, said: “With the run-up to the Budget and the rumour mongering that comes with it now in full flow, the government seems to be giving the UK’s banking sector some mixed messages”.
Industry body UK Finance wrote to Healey and Andy Burnham earlier this week with analysis around the economic impact of a hike to the banking surcharge.
The surcharge currently sits at three per cent after being reduced from eight per cent under Jeremy Hunt’s Chancellorship in 2023. A reversal of this move is being viewed as one of the top levers available for Healey, which would be expected to raise some £2bn a year.
“The pro-growth choice at the Budget is to maintain tax stability and work with the sector on reforms that increase its capacity to finance the wider economy,” UK Finance chief David Postings wrote to Healey.
One top banker told City AM: “Any such increased tax would be a tax on investment – it’s as simple as that.”
Lobbyists have raised concerns around taxation hammering the international competitiveness of the UK. Figures from PwC show total taxes on UK banks amount to 46 per cent of profits, compared to 42 percent in Amsterdam, 39 per cent in Frankfurt, 29 per cent in Dublin and 28 per cent in New York.
Louise Hellem, chief economist at the CBI, said the government should avoid measures that would “weaken incentives to invest”.
“With the business tax contribution already at a record share of receipts, that means avoiding further sector-specific taxation, including on a banking sector already facing a higher tax rate than competing international financial centres.”
A Treasury spokesperson said: “As has always been the case, decisions on tax are a matter for the chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals.”