UK banks already face some of the heaviest profit taxes of any sector and pay more than lenders in most other countries. Executives warned that further pressure could harm the wider economy.
“Additional taxation on banks risks undermining our ability to keep investing in the business, support customers and ultimately drive UK growth,” one chief executive said on Wednesday, as his bank reported a 29% fall in second-quarter profits.
The warning comes amid growing speculation that chancellor Rachel Reeves could announce fresh tax rises in her autumn budget as the outlook for public finances deteriorates. Although banks have so far avoided sector-specific hikes, a leaked memo from deputy prime minister Angela Rayner in May urged consideration of new wealth taxes, including a higher corporation tax rate on banks.
Currently, banks pay the 25% headline corporation tax, a 3% surcharge, and a separate levy on certain balance sheet assets. UK Finance and PwC estimate the sector’s total tax rate at around 45.8%, compared with 38.6% in Frankfurt and 27.9% in New York.
Charlie Nunn, chief executive of Lloyds Banking Group, cautioned that further tax increases could clash with Labour’s strategy of using the City to power an economic recovery, saying such moves “wouldn’t be consistent” with the government’s growth agenda.
Financial services are one of eight priority sectors in Labour’s industrial strategy, with the Treasury already pushing deregulatory changes aimed at boosting investment. Executives pointed to resilience in credit indicators, jobs and falling inflation as reasons for optimism, alongside new trade deals struck with the US, EU and India.
But the optimism was tempered by HSBC’s results, which revealed a larger-than-expected hit to profits from exposure to China and Hong Kong. The bank booked a $2.1bn paper loss on its stake in Bank of Communications following a recapitalisation, and a further $400m charge linked to weak commercial property markets in Hong Kong.
Those impairments dragged HSBC’s pre-tax profits down 29% to $6.3bn in the April-June quarter, compared with $8.9bn a year earlier. Despite the fall, the London-headquartered lender pledged a dividend of 10 cents a share and a buyback of up to $3bn before third-quarter results in October.