Ahead of the 2024 Autumn Budget, Prime Minister Sir Keir Starmer warned Labour’s first fiscal event was “going to be painful”.
He added those with the broadest shoulders “should bear the heavier burden” as Chancellor Rachel Reeves battled against an alleged ‘£22bn black hole’ inherited from the Conservative government.
After lobbying efforts, banks were spared from the £40bn tax raid in the 2024 budget.
But after government U-turns, weak growth forecasts and a £190bn splurge in the Spending Review, Reeves is poised to return for more in her second budget – and banks may not be so lucky this time.
JP Morgan has suggested Reeves will need to find £30bn to maintain her fiscal rules, whilst the National Institute for Social and Economic Research suggested a staggering £50bn.
The FTSE 100’s Big Five banks – Barclays, HSBC, Natwest, Lloyds and Standard Chartered – pocketed a total of £12.8bn in the second-quarter of 2025.
Had it not been for a hefty fine slapped on HSBC for activity in China’s Bank of Communications, the lenders would have stormed past 2024’s second quarter total of £13.6bn.
But, as analysts at Jefferies noted, “the UK fiscal position is the elephant in the room”.
The Chancellor faces a whole host of options where she could turn to the banks for a cash grab, though each would face fierce opposition from an industry that already finds itself taxed well-above its peers overseas.
Reeves channels her ‘Iron’ Chancellor
The Institute for Public Policy Research (IPPR) has suggested Reeves raid the banks’ earnings from quantitative easing (QE) reserves.
QE’s “flawed policy design” meant “public money is flowing straight into commercial banks’ coffers,” the left-wing think tank argued.
The system involved the Bank of England buying a large amount of government bonds from commercial lenders to lower interest rates and stimulate the economy.
The central bank created new reserves to pay for these bonds, but as interest rates climbed to a post-financial crisis high of 5.25 per cent, the bank was forced to pay lenders higher interest on the reserves than what it earned from the bonds.
The move would mirror Margaret Thatcher’s one-off 2.5 per cent tax on lenders’ non-interest-bearing deposits in 1981, the IPPR said.
Whilst Reeves has described herself as the “Iron Chancellor,” such a move would spark backlash from the City.
Banking shares tumbled following the IPPR’s report, with Natwest topping the FTSE 100’s fallers, down nearly six per cent. Lloyds was narrowly behind at nearly five per cent and Barclays at four per cent.
Chris Beauchamp, chief market analyst at IG, said the budget rumours had been “given more weight than might otherwise be the case”.
He added the banks had “left the FTSE 100 in the dust since late 2022” with strong rallies over the last year. The index’s Big Five has added nearly £80bn in market value since the beginning of 2025.
A surcharge push from Rayner
Deputy Prime Minister Angela Rayner weighed in on a cash grab on the banks earlier this year in a leaked memo addressed to Reeves.
Starmer’s second-in-command suggested raising the surcharge, which sits on top of corporation tax, to five per cent from two per cent. This would effectively set the sector’s total corporation tax at 30 per cent.
Banking industry body UK Finance pushed back on Rayner’s suggestion, arguing the sector already faces sky-high tax rates.
A report from the body and Big Four accounting firm PwC showed London’s sector tax rate dwarfs its rivals overseas.
The report found that for every £1 of taxes levied on banks’ profits through corporation tax, another £1.59 is collected through the banking surcharge, levy, social security payments and irrecoverable VAT.
Along with employment taxes, the sector is estimated to contribute nearly £45bn per year to the public purse.
Further tax rates would have an “important bearing” on investment decisions and growth, according to David Postings, the chief executive of UK Finance.
“To make the UK’s approach to bank taxation globally competitive, we think the government should phase out the bank corporation tax surcharge and the bank levy over time.”
An ‘easy’ answer to U-turns
Monetary reform group Positive Money floated a tax raid on lenders earlier this year, suggesting Reeves could use a levy to plug government U-turns.
The group pointed to the UK’s Energy Profits Levy—a temporary tax on the “extraordinary profits” of firms producing oil and gas, as energy bills skyrocketed.
Over £11bn could be added to the public purse with a similar levy on just the big four banks, Positive Money estimated.
The calls followed the bosses of Britain’s banking giants sounding the alarm on any new tax raids in half-year reporting season.
Natwest’s Paul Thwaite warned “strong economies need strong banks” as he argued he would rather use the bank’s capital for loans to boost growth “for the good of the country”.
CS Venkatkrishnan, Barclays’ chief executive, argued banks were “already among the biggest tax payers in this country”.
Minor tax moves hit profit
Analysis from Benjamin Toms, equity analyst at RBC, suggests Natwest and Lloyds would be most vulnerable to even marginal adjustments in the tax rate.
Natwest, which pocketed a pre-tax profit of £6.2bn in 2024, would lose near-£140m to a surcharge in line with Rayner’s calls. Meanwhile, Lloyds was hit by nearly £120m.
Tomasz Noetzel, banking analyst at Bloomberg Intelligence, said the top four banks “could face an almost £10bn charge over two years” if the proposed levy by the IPPR were introduced.
“This equates to 18 to 20 per cent of those banks’ combined consensus 2026-2027 pretax profit,” he added.
Will Reeves turn on the banks?
The Chancellor has turned to banking bosses throughout the last year for crisis tariff talks and growth summits.
In her bid to invest heavily in the City markets, Reeves has enlisted high-street banks for a major advertising push.
The banking industry was also named a big winner in the Treasury’s Mansion House reforms as Reeves slashed post-2008 regulations and promised to consult on the widely-opposed ring-fencing regime.
Whilst the banks got what they asked for on the deregulation front, the tide could turn come the budget.
The Financial Times reported that City figures were expressing fears that banks were a politically “easy target” for taxes.
“We aren’t stupid. There’s a bunch of Labour MPs, including Angela Rayner, who are looking for ways to get more money. Financial services are an obvious target,” one figure told the FT.
A number of analysts think a hefty raid on the banks is unlikely. Noetzel said the IIPR’s levy was “unlikely to be enacted, as any government measures to ease public finances would need to consider growth implications”. Meanwhile Jefferies analysts said they weren’t “overly worried” about bank taxes.
However, they admitted fears were “slightly” higher than when banks narrowly escaped the clutches of a Reeves’ tax raid last year.