UK banks face new profit tax as shares drop after IPPR proposal

UK bank shares fell sharply after calls for a new tax on banking profits. Traders and investors reacted to suggestions that a windfall tax could raise up to £8bn a year. The proposal came from the think tank Institute for Public Policy Research (IPPR), which said it could reclaim taxpayers’ money spent supporting banks.

The Treasury did not comment on tax speculation but said the government is "cutting red tape" for the City of London and prioritizing financial services. On Friday, NatWest and Lloyds shares fell more than 4% in early trading, while Barclays fell over 2%. By the end of the day, NatWest was still down over 4%, Lloyds over 3%, and Barclays more than 2%, as reported by BBC.

Banks protest new tax

Charlie Nunn, Lloyds CEO, warned that tax rises would clash with efforts to boost the UK economy and financial services. IPPR, a left-leaning think tank, said a bank levy is needed because the Bank of England's quantitative easing (QE) costs taxpayers £22bn a year. QE began after the financial crisis and in 2020 to support the sector by buying government bonds.

To buy bonds, the Bank of England added new electronic money to commercial banks’ accounts. The Bank started reversing QE in 2022 but still loses money because interest on deposits is higher than interest earned on bonds. The Bank also loses money selling bonds below their purchase price. IPPR said this is like a "government subsidy to commercial banks," while commercial bank profits rose by $22bn since before the pandemic, as per the report by BBC.

Tax could save £8bn

The tax proposal comes as Chancellor Rachel Reeves prepares her Budget and must meet her own rules on taxation and spending. Carsten Jung, IPPR associate director, said the Bank and Treasury "bungled the implementation of quantitative easing." Jung added that public money flows straight to banks while families struggle with costs, calling it "multi-billion-pound cheques to bank shareholders."

Jung told BBC’s Today programme that the £22bn loss is about the same as the Home Office's annual budget. IPPR said a targeted bank levy would recover some losses, still leaving banks with high profits and could save the government £8bn a year. UK Finance, a financial services body, warned a new tax would make Britain less competitive, as per the report by BBC.

UK banks already pay a corporation tax surcharge (8% extra on profits since 2021) and a Bank Levy (based on bank size, since 2011). UK Finance said a new tax would contradict the government’s aim to support financial services. Russ Mould, AJ Bell investment director, said the UK stock market fell as investors worried about future bank profits, dividends, and buybacks.

The Treasury said it is boosting the City’s competitiveness and wants the UK as "number one destination for financial services by 2035." The government claims to be pro-business and says financial services are central to economic growth plans. Chancellor Rachel Reeves has worked to win over the City since Labour came to power.

In July, Reeves announced the “Leeds Reforms” to encourage investment and ease post-financial-crisis rules that banks said were too strict. Reeves faces pressure to find more revenue after reversing welfare savings and winter fuel allowance cuts, limiting her budget flexibility, as per the report by BBC.

FAQs

Q1. Why did UK bank shares fall recently?
Shares dropped after calls for a new tax on bank profits that could raise £8bn a year.

Q2. What is the proposed bank tax for?
The tax is suggested to recover taxpayer money lost from the Bank of England's QE program while banks earn high profits.