Reeves Urged to Cut Bank Tax as UK Competitiveness Lags | CityAM

Rachel Reeves, the UK’s Shadow Chancellor, is facing mounting pressure to ease the tax burden on the banking sector, as new research highlights a growing competitive disadvantage for British lenders. While Reeves spared banks from immediate tax increases in the recent Autumn Budget, a report from the Association for Financial Markets (AFME) and KPMG argues that further action is needed to bolster the industry’s standing.

The AFME contends that while politically motivated taxes on banks may be tempting, the costs are ultimately passed on to customers and businesses, hindering broader economic growth. In the 2024-2025 financial year, UK banks contributed approximately £35.2 billion in taxes, a figure that remains consistent with pre-financial crisis levels, according to HMRC statistics. However, the overall tax rate levied on UK banks has risen to 46.4%, up from 45.8% the previous year, largely due to increases in employer national insurance contributions.

The UK banking sector currently faces a complex tax structure, encompassing a sector-specific levy, a surcharge on profits, corporation tax, VAT, property taxes, national insurance, and other standard business taxes. The bank levy, designed to encourage safer balance sheets, taxes banks on their debts and liabilities, with higher rates applied to short-term debt and lower rates to longer-term debt. The profit surcharge adds an additional 3% to the standard 25% corporation tax rate.

The AFME is advocating for a commitment from the government to refrain from increasing bank taxes for the remainder of the current parliament and to ultimately phase out the bank levy, aligning the UK’s tax regime with that of other major economies. This call for simplification comes as the UK seeks to maintain its position as a leading global financial center.

The debate over bank taxation comes at a sensitive time for the UK economy. While Reeves avoided a tax raid in the Autumn Budget, the possibility of future increases remains a concern for the industry. David Postings, chief executive of UK Finance, cautioned against “quick fixes” in the budget, warning that additional taxes could erode the competitiveness of London’s banking sector. Speaking in November 2025, Postings highlighted that the effective tax rate for UK banks already stands at 46.6%, comprised of corporation tax, a bank surcharge, and the bank levy, before accounting for national insurance and VAT.

Postings emphasized the significant economic contribution of the banking sector, noting that it directly employs 369,000 people and generates £1 in every £25 of tax revenue, equating to approximately £120 million per day. He urged the Chancellor to prioritize a stable tax environment for banks, arguing that a healthy banking sector is crucial for driving economic growth and innovation.

The pressure on Reeves extends beyond industry lobbying groups. Senior banking executives have privately expressed concerns about the fairness and impact of the current tax regime, with one industry source reportedly describing the bank levy as a “stupid f**king tax” and “unethical.”

Despite these concerns, Reeves faces competing demands as she prepares for future budgets. She is expected to identify at least £20 billion in tax increases to meet her fiscal rules. Capital Economics recently identified bank taxes as a likely source of revenue, suggesting that the sector may remain in the government’s crosshairs.

The situation is further complicated by political uncertainty. While the current government has shown some willingness to listen to industry concerns, a change in leadership could lead to a more interventionist approach, potentially jeopardizing the sector’s stability. The prospect of a future government led by Nigel Farage, who has openly advocated for increased taxes on banks, adds to the industry’s anxieties. Farage has proposed taxing profits generated from quantitative easing, framing it as a way to recoup public funds.

Lucy Rigby, a City minister, recently argued that banks should be taken off the “naughty step,” signaling a desire to foster a more supportive regulatory environment. However, this sentiment may be overshadowed by the broader fiscal challenges facing the UK government. The debate over bank taxation is likely to continue as Reeves navigates the competing pressures of economic stability, fiscal responsibility, and the need to maintain the UK’s competitiveness in the global financial landscape.

Analysts at Moody’s have warned that a shift towards a more left-leaning leadership could create an “uncomfortable” environment for the banking sector, highlighting the political risks facing the industry. The outcome of the next general election and the subsequent policy decisions will be critical in determining the future of bank taxation in the UK.