Healey Poised to Tax Britain’s Banks in 28 October Budget, Guardian Reports

Britain’s banks are bracing for what could be the most significant tax hit on the sector in years, after the Guardian reported on Thursday that Chancellor John Healey is poised to raise taxes on lenders in his first budget on 28 October, a move aimed at shoring up the public finances after the strain of conflict in the Middle East.

The report, which sent banking shares lower in Friday trading, says Healey has decided to tap the financial sector for additional revenue to keep the Treasury’s deficit-reduction plans on track in the face of rising government borrowing costs. It is the clearest signal yet that banks — fresh off a run of record profits powered by higher interest rates — will be asked to help pay for Britain’s strained exchequer.

British banking stocks fell slightly on Friday, according to Reuters, after the report was published. Barclays, Lloyds and NatWest were down between 0.2% and 1.8% in early trade, underperforming eurozone banks, which were up 0.9%. Analysts covering the sector have said one option open to the chancellor would be to raise the 3% surcharge that banks pay on their profits on top of standard corporation tax — potentially restoring it to 8%, the level before former Conservative chancellor Jeremy Hunt cut it.

Reversing Hunt’s cut would raise upwards of £2bn a year, according to estimates cited in the Guardian’s report, and could bring in as much as £2.25bn a year, according to analysis by the Trades Union Congress. The surcharge currently raises just over £1bn a year.

The revelation lands at a delicate moment. Healey is in Bangkok for the International Monetary Fund’s annual meeting, where the fund has praised Britain’s progress towards balancing the books and urged him to “stay the course”. But Britain’s cost of borrowing has risen sharply in recent weeks, according to the Guardian, alongside that of other big economies, as bond markets responded to the prospect of higher inflation from the Middle East conflict. Analysts have suggested that could roughly halve the £24bn cushion his predecessor, Rachel Reeves, had built up against Labour’s fiscal rules at the March spring forecast.

From Bangkok: no denial, no reassurance

Asked by reporters in Bangkok about the prospect of a windfall tax on banks’ bumper profits, Healey declined to give a steer on his intentions, according to Reuters. But his choice of words will have done little to calm nerves in the City.

“My observation on the banks is that people too often see them as big, distant financial institutions, when they are hardwired into the economic fabric of this country and our future prospects,” he told journalists. Pressed on the looming budget decision, he added: “I’ve got decisions to take in the budget and I will,” stressing that his comments were not intended to be read as a signal either way.

Bank bosses have been lobbying intensively against any tax rise since narrowly escaping higher levies in last year’s budget. According to the Guardian, executives from lenders including HSBC, Lloyds, NatWest, Barclays and Santander met Healey last week but left without reassurance that tax hikes had been ruled out.

The industry’s warnings have been blunt. The banks’ lobby groups — UK Finance and TheCityUK — wrote to Healey days after the meeting, saying that on top of weakening investor confidence and damaging the UK’s attractiveness as a financial centre, higher taxes would force them to move staff and business out of the country.

That echoed a warning by the chief executive of JP Morgan, Jamie Dimon, who said in May that he could scrap plans for a new £3bn London headquarters if the government became hostile towards banks. News of the tower — set to house more than half of the US investment bank’s 23,000 UK staff — was unveiled just days after Reeves spared the sector from further tax rises in her 2025 autumn budget.

Industry figures are nevertheless resigned to a rise in the surcharge, the Guardian reports. They believe Healey will reverse Hunt’s cut — taking it back to 8% — but go no further. The government has also been listening to representations from specialist and challenger banks including Revolut and Shawbrook, which want the profit threshold at which the surcharge kicks in to be raised from £100m to £500m — a nod to the need to avoid crushing startup lenders. One government source told the Guardian that Labour was mindful of needing a positive environment for startup banks, particularly the lending they offer to small businesses.

Why the banks are in the crosshairs

The case for a bank tax rests on two pillars: the banks’ extraordinary profits, and the Treasury’s urgent need for money.

Lenders have been logging strong earnings on the back of rising interest rates. According to figures cited by the Guardian, Britain’s four largest lenders — HSBC, NatWest, Barclays and Lloyds Banking Group — alone generated £200bn in pre-tax profits over the past five years. Shares of the big four have fallen between 3% and 5% in October so far, partly on pre-budget jitters, according to a market analysis published on Friday — but they remain broadly in line with European peers after years of handsome returns.

Unions and thinktanks have repeatedly urged the government to tax banks more heavily. Paul Nowak, the general secretary of the TUC, said the big four banks were “making a billion pounds a week, while bonuses have hit a post-crash record”, describing the profits as driven by high interest rates and households’ mortgage misery. “It’s time to make sure banks pay their fair share,” he said.

The TUC has lobbied for a far more punitive increase — raising the surcharge to 16%, which it says could bring in £24bn in tax revenues over the next four years.

The second pillar is fiscal arithmetic. Reeves built up a £24bn margin against her fiscal rules, but rising gilt yields have eaten into it. Healey is understood to be willing to accept a narrower “headroom”, the Guardian reported, but he is also keen to convince bond markets that he remains wedded to deficit reduction — an echo of the credibility-conscious approach that has defined Labour’s economic stewardship.

This marks a shift from his predecessor. Reeves considered taxing the banks more heavily but ultimately rejected the option, wary of deterring future investment into Britain. Healey’s willingness to cross that line signals both his room for manoeuvre and the pressure on the public finances.

The politics of a bank raid

Politically, a bank tax is easy to sell. Banks are unpopular; their profits have been inflated by interest rates that have simultaneously squeezed mortgage holders. A surcharge rise can be presented as fairness — making lenders pay more at a time when the government says it wants to give “breathing space” to consumers and businesses facing rising energy prices, as Healey put it in Bangkok.

The Conservatives have pushed back. Kemi Badenoch, the Conservative leader, used a visit to a financial services firm in Edinburgh on Thursday to caution against further banking tax rises, saying the sector already faced a higher effective tax rate than many other big global financial centres. Andrew Griffith, the shadow chancellor, said Britain needed growth and that “a raid on the financial services sector will stifle it”, urging Labour to cut spending rather than raise taxes again.

The banks’ own lobby has leaned heavily on competitiveness. Britain’s financial sector is one of the country’s genuine economic crown jewels, and its leaders argue that piling taxes on top of already-elevated levies risks pushing business — and jobs — abroad. The surcharge debate therefore pits two visions of post-Brexit Britain against each other: one that sees banks as a fiscal cash cow to be milked, and one that sees them as the goose laying golden eggs that must be kept happy.

Healey’s budget is shaping up as far more than a bank-tax story. He is expected to set out an energy support package for households and businesses, give more detail on plans to devolve income tax to mayoralties, and explain how the government will fully fund the four-year defence investment plan announced by Keir Starmer before he stepped down as prime minister. Healey himself has said he wants the budget to give “breathing space” to both consumers and businesses.

But there will be little additional funding for other Whitehall departments, which he stressed would have to stick to the budgets Reeves set out at her 2025 spending review. “It’s important that they do manage within what they’ve got, and it’s part of the job,” he said. The Institute for Fiscal Studies has warned that Reeves’s plans could result in real-terms spending cuts for some departments in the later years of the spending review period.

One longer-term question Healey is expected to duck, according to the Guardian, is when the UK will spend 3% of gross domestic product on defence — the very issue over which he resigned as defence secretary in June, an episode that contributed to Starmer’s downfall.

Analysis: Why It Matters

The significance of this story is not the £2bn a year. In a budget of over £1tn, £2bn is a rounding error. What matters is what the move reveals about the state of Britain’s public finances — and about the chancellor’s political strategy.

First, the fiscal picture. When a government starts hunting for revenue in a single sector’s bumper profits, it is a sign that the normal tax levers are exhausted or politically unusable. Labour promised in its manifesto not to raise income tax, national insurance or VAT on working people — pledges that box Healey in tightly. With the gilt-market cost of borrowing rising and the Reeves headroom shrinking, the chancellor needs money from somewhere that does not break those promises. Banks, with their £200bn of five-year profits and their unlovely public image, are the path of least political resistance.

Second, the credibility play. Bond markets are the silent audience for every budget, and the lesson of the Truss mini-budget of 2022 — which triggered a bond and sterling rout by announcing unfunded tax cuts — still haunts Westminster. Healey’s talk in Bangkok was all about discipline: “stay the course”, deficit reduction, restraint. A targeted bank levy that raises real money while sparing households fits the strategy of showing markets he will not let the deficit drift. Whether markets believe him depends less on £2bn from banks than on the overall package — and on whether his growth story is convincing.

Third, the City relationship. Financial services contribute a disproportionate share of UK tax revenue — roughly a tenth of total receipts — and employ over a million people. Reeves understood the fragility of that relationship and held off the levies. If Healey pushes ahead, he is betting that the anger of bank bosses is containable, that Dimon’s £3bn-tower threat was theatre, and that the surcharge can be raised to 8% without triggering the relocation warnings that UK Finance has issued. That bet deserves scrutiny: banks cannot move as easily as lobbyists suggest — London’s ecosystem of talent, law firms and regulators is not replicable overnight — but neither is the threat empty. A tax that is framed as temporary has a habit of becoming permanent, and the surcharge has been with Britain in some form since 2016.

Fourth, the fairness question cuts both ways. It is true that banks have prospered while borrowers suffered. The high interest rates that filled lenders’ coffers were the same rates that piled pressure on mortgage holders — the “mortgage misery” Nowak cited. There is a coherent argument that profits earned on the back of monetary tightening are fair game for redistribution. But it is also true that banks argue they already pay some of the highest effective tax rates among global financial centres, and that higher taxes will ultimately be passed on to customers in fees and charges. The question is not whether banks can afford it — they can — but who ultimately pays, and whether the price is higher prices or thinner credit.

Finally, watch what Healey does about the challengers. His willingness to hear out Revolut and Shawbrook on raising the surcharge threshold from £100m to £500m suggests he wants a tax that lands on the giants without stifling the small lenders that compete with them. That is smart politics and smart economics: the biggest complaints about Britain’s banking market are about concentration, not competition. But it also creates a cliff edge — lend too much, cross the threshold, and your tax bill jumps — which is precisely the kind of distortion economists warn against.

What to Watch Next

1. Budget day, 28 October: The Guardian report says Healey is “poised” — not committed. Watch whether the surcharge rises to 8%, stops somewhere smaller, or whether the whole idea is quietly parked after the market reaction. Also watch whether the challenger-bank threshold rises to £500m.
2. Gilt markets in the coming weeks: Britain’s borrowing costs have been rising alongside other big economies. If the budget fails to convince, expect the pound and gilts to wobble — the ghost of 2022 still looms over every fiscal event.
3. The banks’ response: UK Finance and TheCityUK have already warned about staff and business relocations. Watch for concrete announcements — or, just as telling, for silence once the announcement lands and lobbying turns to damage control.
4. Energy support and defence funding: The budget must also spell out the energy support package for households and businesses and how the four-year defence plan will be fully funded. These commitments compete with deficit reduction for the same shrinking pot.
5. Labour’s fiscal rules: How much of Reeves’s £24bn headroom survives will be the headline number of the budget. Healey may accept narrower headroom — but bond markets will decide whether that looks like prudence or fragility.

Sources

• The Guardian: “John Healey poised to raise taxes on banks in budget”
• Reuters: “UK banking stocks dip on media report of budget tax increase”
• The Oldham Times: “John Healey Budget 2026: TUC calls for more tax on bank profits”
• Analysis: “How Healey’s first UK budget could ripple through markets”