This week has been remarkable for banking institutions in the United Kingdom. Driven by elevated interest rates and market instability stemming from the US’s conflict with Iran, prominent banks have disclosed impressive half-year earnings, enabling executives to enhance bonuses and distribute billions to shareholders.
The four largest UK banks—HSBC, NatWest, Barclays, and Lloyds—collectively reported profits of £29.2 billion for the first half of the year, with £13.7 billion allocated to investors via dividends and share repurchases.
These substantial profits have intensified calls for an increase in taxes on banking profits. Advocates argue that a tax hike on the top four banks could generate approximately £19 billion, which would assist in alleviating living costs and reforming the UK’s social care system, as proposed by Prime Minister Andy Burnham.
Paul Nowak, the general secretary of the Trade Union Congress (TUC), stated last week, “This is not a ‘hard choice’. Banks are perfectly capable of contributing more in taxes. This is an opportunity for the new prime minister and chancellor to demonstrate their priorities.”
The advocacy group Positive Money expressed similar views, urging Burnham to diverge from previous leaders by resisting pressure from City lobbyists and implementing a windfall tax on bank earnings. They believe the proceeds could provide essential support for households and businesses facing financial challenges.
While Burnham has not yet commented directly on the possibility of a bank tax, he previously mentioned in June the urgent need for assistance amid rising expenses, stating, “While I will be cautious with public finances, I aim to provide some relief for Britain as swiftly as possible.”
Nowak emphasized the urgency of the situation, indicating that as the conflict in Iran continues, energy prices are likely to increase further, necessitating additional governmental measures to safeguard households. He reiterated the call for heightened taxes on bank profits to help mitigate costs.
The banking sector is prepared for resistance, having spent nearly twenty years contesting the taxes imposed as a consequence of the 2008 financial crisis. Influential leaders in the industry have already issued warnings, suggesting that higher taxes could impede vital lending and put significant investments at risk. Jamie Dimon, CEO of JP Morgan, remarked, “We’ve likely paid around $10 billion (£7.4 billion) in extra taxes thus far, which I consider neither fair nor justified. If this trend continues, we may need to rethink our strategies.”
Paul Thwaite, CEO of NatWest, argued that tax increases would hinder lending and negatively impact the economy. Following a 29% rise in profits, he stated, “To foster robust economies, we require strong banks. It’s vital to maintain consistent and stable policies.”
Barclays articulated that its lending capabilities are essential for supporting Burnham’s growth initiatives, warning that any financial constraints could limit available funding for businesses and consumers. Anna Cross, the chief financial officer, noted, “Our history of supporting UK growth through lending is crucial for economic health, and we hope that will be taken into account.”
As the banks’ lobbyists gear up to demonstrate that Burnham’s growth strategies could falter without their backing, the topic of windfall taxes on banks remains contentious. Despite ongoing efforts by bank executives to rebuild their reputations since the 2008 crisis, these taxes have consistently faced opposition.
In the wake of taxpayer-funded bailouts, previous Conservative ministers viewed banks as prime candidates for new taxes during a period of austerity. The introduction of the bank levy by then-Chancellor George Osborne in May 2010 aimed to recoup billions from the UK’s largest banks by taxing a portion of their balance sheets. However, this led to backlash from bank leaders.
By 2015, HSBC’s chief executive, Stuart Gulliver, frustrated by the increasing regulatory demands and the bank levy, suggested the possibility of relocating their headquarters to Hong Kong. “This is not a threat; it’s a thorough assessment,” he asserted.
Concerns over potentially losing major financial institutions prompted Osborne to revise the bank levy, restricting it to cover only UK-based balance sheets and significantly easing the burden on HSBC. He also responded to grievances regarding the frequency and unpredictability of levy increases, reducing the rate from 0.21% to 0.10%, resulting in a substantial drop in annual tax revenue.
Osborne introduced an additional measure intended to distribute the tax burden more evenly across the sector, imposing an 8% tax on bank profits. However, in response to worries that Brexit might disadvantage London compared to other financial hubs, then-Chancellor Rishi Sunak announced a reduction of this charge to 3% starting in April 2023.
Nevertheless, the post-COVID rise in interest rates and an ensuing cost-of-living crisis—marked by inflation reaching 11%—have once again brought bank profits under scrutiny. In July 2023, members of the Treasury committee criticized banking executives, accusing them of profiteering while ordinary consumers struggled.
As various European governments, including those in Italy and Spain, implemented windfall taxes on banks to assist households in need, pressure on UK banks has intensified, prompting them to reassess their position amidst the looming threat of increased taxation.
