To tax or not to tax? John Healey’s banking dilemma ahead…

The battle lines are already being drawn ahead of John Healey’s first budget on 28 October. As ever, the question of whether to bash the bankers is shaping up to be a key fight.

To Healey’s left, the Green party called last week for a 38% windfall tax on bank profits. On the other side, the trade body UK Finance has been warning of a “hit to international competitiveness” and Wall Street titans such as JP Morgan’s Jamie Dimon and Citi’s Jane Fraser are hinting at consequences if the sector is targeted by the Treasury.

The new chancellor takes the reins as rising borrowing costs gradually erode the buffer against the government’s fiscal rules. He’s also responsible for finding the cash to fund the various spending announcements made since his boss took office. Will he be able to weave his way through?

Bank profits might look like an appealing target for additional revenue. Natwest, Lloyds and the UK arms of Barclay and HSBC reported a combined £13bn in pre-tax profits for the first half of 2026. The net interest margin – the gap between what a bank charges people borrowing and what it pays people who are saving – increased in the case of one lender by 15 basis points year-on-year (essentially, banks were quicker to pass on rate cuts to savers than to borrowers).

Some argue that banks are also neglecting to take on risk with loans to small businesses, leaving private credit “shadow banks” to step in instead.

“At a time when the government’s capacity to intervene financially in the economy is genuinely constrained, the strength of the banking system ought to be a valuable offset to the state’s fiscal handcuffs – private balance-sheet capacity stepping in where public capacity cannot,” says John Flint, former chief executive of HSBC. “But that isn’t how it is working in practice. The pendulum has swung too far the other way, into risk aversion.”

Angela Knight, former chief executive of the British Banking Association and before that a Conservative minister, agreed, but cautioned against raising taxes on the sector: “Our very risk-averse banks are profitable, there’s no two ways about that, and I can see why politicians say let’s milk them for more money. But they are not cash cows, they are a great driver of the British economy… Tax them more and the consequences will be felt right the way through from mortgages going up to contributions to pension funds going down.”

If the fiscal and political arithmetic is such that the government decides that some kind of bank tax is necessary, the options include:

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Raising the 3% surcharge on bank profits (paid on top of standard corporation tax), which was set at 8% before April 2023;

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Increasing the “bank levy” on UK-based equities and liabilities on their balance sheets;

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Designing a new windfall tax directly targeted at “excess” interest paid to commercial banks on their reserves held at the Bank of England;

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Implementing a system of “reserve tiering”, which would mean the Bank of England paying lower interest or no interest on a portion of those reserves.

Any of these options would be met with howls of opposition from the banking sector, who would argue that households, businesses and economic growth would be the ones to ultimately suffer from additional levies. Some options would certainly be riskier than others. Any change to the plumbing of the monetary system – which is what a system of tiered reserves would entail – would need to be designed and communicated extremely carefully, and not rushed through in pursuit of a few extra billion.

Against a fractious global backdrop, Healey may decide to play it safe. One former Treasury adviser suggested that the forthcoming budget would likely be a “muddle through”, consisting of “hoping the headroom isn’t eroded too much, finding single figure billions and living to fight another day”. Even so, if the profits continue to roll in, the calls for a bank tax will only grow louder.

Photograph by Henry Nicholls/AFP/Getty Images, Jose Sarmento Matos/Bloomberg via Getty Images