Banks are already gearing up to fight another Burnham tax grab

LONDON — Banks in Britain are resigned to a 15-month hike in their taxes — as long as they don’t become permanent.

Their Spanish counterparts have a cautionary tale.

U.K. Chancellor John Healey did the unthinkable in his first budget Wednesday by doubling the levy banks pay on their profits, a move lenders have lobbied hard against for two years.

In good news for the City of London, the hike was less than expected and temporary: from 3% to 6% from January 2027 for 15 months.

But 15 months is a long time in politics and, as the U.K. government struggles with an increasingly fragile budget and cost-of-living struggles amid the ongoing war in Iran, it might be hard for British politicians to resist dipping their hands back into the banks’ coffers in mid-2028.

If it’s anything like Madrid, banks face a nervous wait.

In 2023, Spain instituted a temporary 4.8% levy on net interest and commission income from banks. However, it was extended past its two-year emergency window, with major banks now paying as much as seven percentage points more under new measures introduced at the end of 2024.

“The market will be sceptical that these changes will be temporary based on experiences elsewhere in Europe such as Spain,” RBC analyst Benjamin Toms said in a research note following the budget.

U.K.-based bank executives are now setting out to warn the Labour government that the doubling of the surcharge must be temporary.

“It's important that the rise in bank taxation is time-limited — it must end as scheduled,” said Chris Hayward, policy chairman of the City of London Corporation. Trade groups like UK Finance and the Association of Foreign Banks issued statements in response to the hike urging the government to refrain from extending it beyond 15 months.

But onlookers aren’t convinced the Treasury will be able to help itself, after Britain's fiscal watchdog warned of “weak growth” in living standards — with real household disposable income for Brits expected to be just 1% higher by the end of this decade than it was in 2020.

“We've seen it with banks taxes in other countries, where everything starts as a temporary tax, but it gets renewed on an annual basis,” added Michael Christodoulou, equity research analyst at Berenberg. “If the fiscal situation is a bit worse next year… maybe they come and say 'we're going to extend it.'”

“I’m doubtful that it’ll be in play for only 15 months,” said Eloise Walker, global head of corporate tax at law firm Pinsent Masons. “UK governments have a poor track record for sticking to temporary taxes in the last decade.”

Healey justified Wednesday’s tax grab by pointing out that Britain supported lenders in the crisis, and now it’s their turn to give back. The £1.5 billion the measure is set to raise over the limited period is due to provide much-needed support for energy bills, which have gone up by hundreds of pounds since the Iran war.

With lenders posting record earnings, up double-digit percentages from previous years as interest rates soar, Healey spied a sector doing particularly well while other businesses and households struggle.

But as rising inflation shows no sign of easing, leading interest rates to potentially stay higher for longer, think tanks and lobby groups behind the call to tax banks more have further impetus to keep pushing.

“When banks inevitably keep making record profits, we have a strong argument for it to go up further,” a senior Trades Union Congress figure, granted anonymity to speak freely, told POLITICO. The TUC was one of the main proponents behind a hike to the surcharge.

“[Healey] said it’s temporary, but I imagine it’ll be like fuel duty where it’s just extended every year,” the figure added. The freeze on fuel duty has been extended for 17 consecutive years since it was first introduced in 2011.

The government insists the tax measure is temporary. In a briefing following the budget, City Minister Lucy Rigby said her boss Healey “places a tremendous amount of value on our banking sector … we are asking the banks to make this time-limited contribution.”

“It's over the course of 15 months, and it will not go on longer than those 15 months. And we will legislate to that effect.”

Banks aren’t taking an extension as a certainty, given that they already flexed their lobbying abilities by bringing the tax down to just a three-percentage point increase, lower than the five-point increase that was widely expected.

“There is always that risk that hang over you with any tax,” a banking lobbyist, granted anonymity to speak freely, told POLITICO. “But we’ll take the chancellor at his word until we’ve got anything to the contrary.”

The tax increase will push rates for investment banks up from 30.8% to 33.7%, according to think tank Tax Policy Associates, bringing the U.K. to levels above Germany and Spain, while sitting below France, Italy and the Netherlands.

It could have been worse. In his speech to parliament, Healey made an appeal to the financial sector, attempting to soften the blow of the surcharge increase.

“Our world-leading banks make a huge contribution to this country in the tax they pay, in the jobs, industry, and investment they support,” he said during the budget. “As chancellor, I want to say directly to our banks: I celebrate, and I am grateful for the role that you play.”

City figures noted the plea, with another banking lobbyist describing the fiscal event to POLITICO as a “peacemaking attempt” with banks, adding it was “just enough to stay within margins and keep everyone on board.”

Meanwhile, RBC’s Toms said that “bank executives will probably sleep soundly this evening,” given the increase was less than expected.

The tax is projected to raise less than £1.5 billion, compared to between £8 billion and £50 billion that could have been raised had the government heeded various think tanks' calls.

Groups in favor of a higher tax take, including the Institute for Public Policy Research and Positive Money think tanks, made their disappointment clear. “Today’s tax rise doesn’t go nearly far enough towards,” said Positive Money co-executive director Sara Hall.