The government has announced that it will impose higher taxes on banks in a bid to help public finances.
In today's Budget, chancellor John Healey announced that he will increase the bank corporation tax surcharge from its current rate of 3% to 6% in January 2027.
This is lower than the 8% expected by economists and means it will not return to the level it was at prior to Jeremy Hunt lowering it in 2023.
Healey said: "As chancellor, I want to say directly to our banks: I celebrate and I am grateful for the role that you play.
"Amid the global economic storms, I am looking to our banks to help fund breathing space for British families.
"And so banks will pay an extra 3% on the bank surcharge. This will be time limited to pay for immediate support on energy bills, starting in January, ending 15 months later.
UK banks currently pay a combined corporation tax rate of 28%, composed of the standard 25% corporation tax plus a 3% surcharge.
The surcharge fell from 8% to 3% in April 2023, while corporation tax rose from 19% to 25%, taking the combined headline rate from 27% to 28%.
The measure could raise more than £1bn annually for the Treasury, but has prompted questions about the potential implications for lending activity and the availability of credit.
A higher bank surcharge will reach borrowers through squeezed margins, tighter lending criteria and fewer incentives, brokers told Newspage, although competition between lenders would limit how much they could pass on.
Brokers have warned that lenders could withdraw cashback, reduce fee-free offers or become more selective about applicants, leaving some borrowers with fewer options even if headline rates barely change.
John Barbour, senior director at banking and credit advisory consultancy Broadstone, commented: “Any increase in bank taxation could have knock-on implications for the availability and cost of credit if lenders respond by tightening lending criteria or becoming more selective about the borrowers they support. It could also accelerate the shift towards alternative and non-bank lenders, creating new challenges around regulatory oversight and the monitoring of credit risks across the market.”
Jonathan Samuels, CEO of Octane Capital, said: “The Chancellor faces a difficult balancing act between raising additional revenue and creating the conditions needed for economic growth. Banking and finance may appear an obvious target for further taxation, but policymakers must be mindful of the potential knock-on effects for lending and investment.
“The property sector relies heavily on access to finance, whether that's developers bringing new homes to market, investors upgrading existing housing stock or buyers navigating increasingly complex transactions. Any measures that discourage lending or make capital more expensive could ultimately undermine the very growth the government is trying to achieve and the property sector desperately needs.”
Peter Grant, partner at UK Banking tax lead, commented: “Markets have already welcomed the modesty of the 3% temporary surcharge being placed on UK banks. Whilst the ambition is to tax the banks to support households with cost of living demands, banks and lenders will have to manage this additional cost, with potential implications for the price and availability of credit.
“If the cost of this is passed on to consumers they will likely feel an impact at a time when many have little financial wiggle room left.
“Mid-sized and specialist banks will possibly feel this most, with fewer options to manage the impact than larger, more diversified lenders. Where retained profits are important to building the capital that supports lending, a higher tax bill, even though modest, could leave less immediate capacity to grow lending to households and businesses, particularly in the tough economic environment.”
Patricia Perlman-Dee, professor of finance at Alliance Manchester Business School, added: “Today’s tax rise on banks, while less than initially feared, will temporarily have an impact on short-term profitability in the sector. Banks' recent earnings performance will mean that they're likely to be able to swallow this hit, but it will still affect the capital they have available for future lending and investments
“Stronger profits this year have made them a natural target for a government that needs to quickly raise additional revenue for the public purse. However, the Government must be conscious of the longer-term concern that this move will make it harder for the financial services sector to remain a competitive, resilient and attractive investment prospect on the international stage.
“This risk will be especially prevalent among the sector’s mid-size and specialised lenders. They face bigger challenges than larger and more diversified banking institutions, and it’s important that they don’t end up being disproportionately impacted by today’s announcements.”
