Chancellor John Healey is set to target Britain’s banking sector for increased tax revenue in his 28 October budget. The move is intended to mitigate the financial strain placed on the UK economy by the war in the Middle East, which has driven up government borrowing costs and threatened the Treasury’s fiscal headroom. Understands, john Healey is poised to tax Britain’s banks in his 28 October budget to help offset the damage inflicted on the public finances by war in the Middle East. Alongside that of other big economies, as bond markets have responded to the prospect of higher inflation as a result of the Middle East conflict, the UK’s cost of borrowing has risen sharply in recent weeks. Analysts have suggested that could as much as halve the £24bn cushion Reeves had built up against Labour’s fiscal rules at the time of spring forecast in March.
While attending meetings in Bangkok, Healey engaged with International Monetary Fund officials who encouraged the UK to maintain its current trajectory toward balancing the national budget. Despite external pressures, the Treasury is exploring options to sustain deficit reduction, with a primary focus on reversing the cuts to the bank surcharge implemented by the previous chancellor, Jeremy Hunt. Industry analysts suggest that restoring the surcharge to its former 8% rate, up from the current 3%, could generate over £2bn annually. Where the International Monetary Fund has praised the UK’s progress towards balancing the books, urging him to “stay the course”, the chancellor is in Bangkok. From 3% at present, industry figures believe that will probably mean raising the surcharge back to 8%. However, industry sources now say they are resigned to a rise in the surcharge. They believe Healey is minded to reverse Hunt’s cut – taking it back to 8% – but not go further. Healey is expected to duck the longer-term question of when the UK will spend 3% of gross domestic product on defence – the issue over which he resigned as defence secretary in June, contributing to Starmer’s downfall.
The nation’s major lenders—HSBC, NatWest, Barclays, and Lloyds Banking Group—have seen substantial earnings growth fueled by higher interest rates, collectively recording £200bn in pre-tax profits over the last five years. TUC general secretary Paul Nowak recently argued that these institutions are generating massive profits while household mortgage costs remain high, suggesting it is time for banks to pay a greater share. Paul Nowak, the general secretary of the TUC, said: “Britain’s big four banks are making a billion pounds a week, while bonuses have hit a post-crash record. To 16%, saying that could raise £24bn in tax revenues over the next four years, the TUC has lobbied for a much more punitive increase.
Healey has publicly defended the banking sector’s role in the UK, telling reporters in Bangkok that these institutions are “hardwired into the economic fabric of this country and our future prospects.” Despite this praise, he is widely expected to proceed with the tax hike. Furthermore, the chancellor is considering requests from smaller banks, such as Revolut and Shawbrook, to increase the profit threshold for the surcharge from £100m to £500m to foster a more competitive environment for emerging lenders.
The prospect of increased levies has drawn significant criticism from industry leaders. Major firms, including JPMorgan, have previously warned that tax hostility could jeopardize investment, such as the planned £3bn London headquarters project. Lobby groups like UK Finance and TheCityUK have cautioned that higher taxes could weaken investor confidence and prompt firms to relocate operations abroad. Saying that on top of “weakening investors confidence and damaging UK attractiveness”, higher taxes would force them to move staff and business out of the country, their lobby groups – including UK Finance and TheCityUK – wrote to Healey days later.
On the political front, Shadow Chancellor Andrew Griffith condemned the proposal as a move that would stifle growth, urging the government to focus on spending cuts rather than tax increases. Conservative leader Kemi Badenoch echoed these sentiments during a recent visit to Edinburgh, noting that the sector already faces a higher effective tax burden than other global financial hubs.
Healey’s upcoming budget will also address several key policy areas, including an energy support package for households and businesses, plans to devolve income tax powers to mayoral authorities, and the funding structure for a four-year defense investment plan. However, the chancellor has warned that other government departments must adhere to the spending limits established by Rachel Reeves in June 2025. Healey has repeatedly been urged by thinktanks and trades unions to tax Britain’s banks more heavily: an option considered but rejected by his predecessor, Rachel Reeves, who was wary of deterring future investment. News of the tower – which will house more than half of the US investment bank’s 23,000 UK staff – was unveiled just days after Reeves spared the sector of further tax rises in her 2025 autumn budget. According to analysis by the Trades Union Congress, such a move would raise £2.25bn a year. According to one government source, Labour was mindful of the UK needing to offer a positive environment for startup banks and especially the lending they offered to small businesses. However, which he stressed would have to stick to the budgets Reeves set out at her spending review in June 2025, there will be little additional funding for other Whitehall departments. “It’s important that they do manage within what they’ve got, and it’s part of the job,” Healey said. “You have to reprioritise if you want to do fresh things, or more.”. Not making their lives even harder, labour should be backing businesses and wealth-creators.
Facing potential real-terms spending cuts in some areas due to strict fiscal discipline, Healey maintains that departments must prioritize their resources effectively. He noted that managing within existing allocations is a fundamental aspect of his role, emphasizing the necessity of reprioritization to initiate new projects. While the chancellor seeks to provide economic breathing space, he continues to navigate the difficult balance of satisfying market expectations for fiscal stability while managing the broader domestic impact of global instability.
