'Households and banks will bear the brunt of higher taxes'

Banks in the UK may soon encounter higher taxes as the government seeks additional revenue in the forthcoming Autumn Budget, according to a leading economist.

“If the Chancellor, Rachel Reeves, is going to continue to meet her fiscal rule with a buffer of £9.9 billion, she will probably have to raise £18 billion to £28 billion in the Autumn Budget, mostly via higher taxes,” Ruth Gregory (pictured right), deputy chief UK economist at Capital Economics, told CityAM.

“We suspect households and banks will bear the brunt of higher taxes and the impact on the economy over the next year will be weaker consumer spending than otherwise, higher inflation and an even worse stagflationary dilemma facing the Bank of England.”

Recent discussions have intensified following a proposal by the Institute for Public Policy Research (IPPR) suggesting that Reeves should target the quantitative easing (QE) earnings of major UK banks. The suggestion, if implemented, has the potential to generate up to £8 billion each year, focusing on banks such as Barclays, Lloyds, HSBC, and NatWest. This approach would be similar to the one-off 2.5% levy imposed on lenders by Margaret Thatcher in 1981.

Capital Economics identified an increase in the bank surcharge and the introduction of a QE levy as the most probable tax measures in the upcoming budget. Both options would likely be “politically palatable” and would not breach the government’s commitment to avoid raising taxes on “working people.”

An increase in the bank surcharge to 8%, which is levied in addition to corporation tax, could generate approximately £1.5 billion. Adjustments to QE-related revenues might provide the Treasury with a further £5 billion.

“The problem is that if the Chancellor wants to raise large amounts of cash, she won’t get it by taxing banks,” Gregory pointed out, suggesting that Reeves may instead opt for several smaller tax increases across various areas, including banks, inheritance, so-called ‘sin’ taxes, environmental levies, and other indirect measures.

For mortgage professionals, these developments could have direct implications. Higher taxes on banks may prompt lenders to increase borrowing costs or tighten lending criteria, potentially affecting mortgage rates and affordability. Advisers are likely to face a shifting landscape and should be prepared to help clients navigate any changes in lending conditions.

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