17th October 2026
Britain's banks are facing the prospect of higher taxes as Chancellor John Healey prepares his Budget for 28 October, with the government under pressure to raise revenue while protecting economic growth.
Reports suggest the Chancellor is considering restoring the bank profits surcharge from its current rate of 3% to 8%. The surcharge is an additional tax on banking profits, on top of corporation tax. Such a change could raise more than £2 billion a year, although the final decision has not yet been announced.
The proposal comes at a difficult time for the public finances. Higher borrowing costs and the economic consequences of the conflict in the Middle East have reduced the government's room for manoeuvre. At the same time, ministers face competing demands for public services, investment and measures to help households cope with the cost of living.
Banks have recorded substantial profits in recent years, helped in part by higher interest rates. The four largest UK banking groups, HSBC, NatWest, Barclays and Lloyds Banking Group, have together generated around £200 billion in pre-tax profits over the past five years, according to figures cited in the Budget debate.
Supporters of a higher surcharge argue that banks can afford to contribute more, particularly after the financial support the sector received during the 2008 banking crisis. They also point out that higher interest rates have increased borrowing costs for many households and businesses while supporting bank earnings.
The banks and their industry representatives take a different view. They warn that increasing taxes could make the UK less attractive for investment and put pressure on lending. Smaller businesses, which depend on banks for working capital and investment finance, could be affected if lenders respond by tightening their terms or increasing charges.
The actual effect will depend on how banks respond. A higher tax does not automatically mean that lending will fall or that customers will face higher fees. Banks might instead accept lower profits or reduce distributions to shareholders. The balance between those possibilities will be important in judging the policy.
The International Monetary Fund has also urged the UK government to consider alternatives, including changes to property taxation, the wider application of VAT and more targeted public spending. It has warned against assuming that further taxes on banks or workers are necessarily the best way to strengthen the public finances.
For Scotland, the implications are practical as well as financial. Small firms seeking loans to expand, buy equipment or manage cash-flow problems need access to affordable finance. Any change that materially affects lending conditions could be felt by businesses far from the financial centres of Edinburgh and London.
The Budget will reveal whether the Chancellor believes a higher bank surcharge offers a reasonable way to raise revenue without damaging investment. The challenge is to ensure that the financial sector makes a fair contribution while preserving the flow of finance needed by businesses and households.
Until the Budget is published, the proposed increase remains just that: a proposal. But the debate highlights the difficult choices facing the government as it attempts to balance public finances, economic growth and the cost of living.