Britain’s biggest banks have issued a warning to Prime Minister Andy Burnham over a potential windfall tax on the financial sector, arguing that further levies could damage investment, competitiveness and ultimately the tax base the government is seeking to expand.
UK Finance, the banking industry’s main lobby group, wrote to the government on Thursday as speculation intensified that Chancellor John Healey could target bank profits in his October 28 Budget.
The intervention puts the banking industry directly at odds with a government under pressure to raise additional revenue while preserving its commitment to deliver “growth in every postcode”.
UK Finance said it was concerned that higher taxes on banks would undermine the government’s longer-term fiscal objectives by weakening the profitability and international competitiveness of a sector that generates substantial tax receipts.
“Increasing taxes on banks would ultimately risk undermining the very tax base the Government seeks to protect and grow,” the organisation said, warning that further sector-specific charges would run counter to the government’s growth agenda.
The industry’s argument rests partly on the already high effective tax burden facing British banks. UK Finance estimates that the sector pays close to 47 per cent, significantly above comparable financial centres.
The equivalent rate is about 28 per cent in New York, 39 per cent in Frankfurt and 42 per cent in Amsterdam, according to the organisation.
Britain’s higher burden reflects a three percentage-point corporation tax surcharge on banking profits above £100 million, alongside a separate levy calculated on banks’ balance sheets.
That structure has already made the UK a relatively expensive location from which to conduct banking business, the industry argues. A further windfall tax would widen the gap at a time when rival jurisdictions are seeking to make themselves more attractive.
Germany, for example, plans to cut its corporation tax rate by one percentage point annually between 2028 and 2032.
The warning comes as ministers face competing demands over the public finances. A tax on bank profits would offer the Treasury an immediately identifiable source of additional revenue and could be politically easier to defend than broad-based increases affecting households.
But the banks argue that the apparent simplicity of the measure conceals a longer-term risk: higher taxation could reduce investment, encourage activity to move elsewhere and diminish future receipts.
The dispute therefore goes beyond the size of the next Budget. It raises a broader question over whether Burnham’s government can simultaneously extract more revenue from internationally mobile industries and build the investment-led growth it has promised.
For the banking sector, the message to Downing Street is blunt. Britain already charges a premium for doing business in the City. Adding another bill may raise money today, but could make the tax base smaller tomorrow.
With Healey’s Budget still weeks away, the banks have fired their warning shot early.
The Treasury must now decide whether the political attraction of taxing bank profits outweighs the risk of making Britain an increasingly expensive place to operate a financial business.
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