‘Taxing banks is a political no-brainer to fill the Chancellor’s fiscal hole’

Since the government rightly backtracked on planned cuts in the welfare bill early this summer, the Chancellor has been beleaguered by the question of how she will meet her self-imposed fiscal rules in the Autumn Budget. The choice before her, if she wishes to remain within those rules under current economic forecasts, is unenviable – cut public spending, or find new ways of raising revenue.

A plethora of proposals have been put forth to prevent the Chancellor choosing the former, from wealth taxes on the super-rich to introducing gambling levies and equalising capital gains tax with income tax. Reform of Britain’s outdated and unequal tax system is absolutely essential and long overdue. However, in the quest to find new streams of income, too little attention has been paid to the government’s outgoing payments, particularly the transfer of tens of billions of pounds per year to the Bank of England to cover its losses.

READ MORE: Labour Party Conference 2025: Full LabourList events programme, revealed

In raising the base interest rate 14 consecutive times between 2021 and 2023, the Bank of England has been paying more and more interest on hundreds of billions of pounds of risk-free reserves held by banks, for which the public foots the bill. 

While cutting back on public spending, the Treasury has quietly paid £85.9bn to cover the Bank of England’s losses between the end of 2022 and March 2025, and is forecast to pay a further £21.7bn a year on average for the next five years doing so. This is the true “black hole” in the public finances.

Banks have made record profits from this practice, with the UK’s ‘big four’ – HSBC, Barclays, Lloyds, and NatWest – reporting pre-tax profits of £45.9bn for 2024. This is equal to around £650 per person in the UK, and is nearly double the average annual profits they made between 2018 and 2021. Based on their results for the first half of this year, these banks are set to beat this record in 2025.

Taxing bank profits to recoup some of those losses is a political no-brainer, particularly when banks have enjoyed significant cuts to the two taxes targeting their profits – the surcharge and bank levy – in recent years. 

Bank bosses have been outspoken in their opposition to higher taxes on the sector. Most recently, Barclays CEO, CS Venkatakrishnan, has been tirelessly warning the Chancellor against such a move, as the Institute for Public Policy Research (IPPR) released a paper in August proposing a tax on bank windfalls.

Subscribe here to our daily newsletter roundup of Labour news, analysis and comment– and follow us on Bluesky, WhatsApp, X and Facebook.

Because banks claim that tax increases would make them less competitive internationally, Positive Money – which has been campaigning for a windfall tax on bank profits since 2022 – has specifically designed a windfall levy which only targets banks’ domestic retail operations, mitigating the risk of banks threatening to move their global or investment banking operations elsewhere. 

Positive Money estimates that a 38% levy, in line with the successful Energy Profits Levy on oil and gas companies, would be expected to bring in more than £11bn from the ‘big four’ banks this year, based on their results for the first half of the year.

Targeting net income from UK banks’ domestic retail operations specifically would also best capture the windfalls banks have made at the expense of the British public, who we know are firmly in favour of such a tax.

Recent polling from the TUC, which is also calling for windfall taxes on banks, shows 66% of the public support the policy, including 73% of Labour voters from the 2024 election now leaning towards Reform. This is consistent with polling commissioned by Gordon Brown, which found that 75% support higher taxes on banks, and with findings from think tank Tax Policy Associates, which showed that taxes on banks were the third most popular to increase with the public.

The government can’t afford to let their cries fall on deaf ears, particularly when Reform UK are capitalising on this issue.

Reform’s deputy leader Richard Tice wrote to the governor of the Bank of England in June, urging him to stop paying interest to lenders and “unnecessarily wasting tens of billions of pounds of taxpayers’ money, while enriching City institutions.” Reform have been banging this drum for several months, with Tice now claiming he’s meeting with Bank of England Governor Andrew Bailey this month, and it’s not hard to see why the idea is gaining traction.

Banks have cut over 6,000 branches across the country in the last 10 years, leaving ‘cash deserts’ across the country where people can’t access their own money. The Treasury Committee found that in the last two years, banks reported over 800 hours of unplanned tech outages – the equivalent of 33 days where people couldn’t access their money digitally. Jobs at banks are constantly being cut. And, perhaps most importantly, they’re not investing in the things people need. 

Analysis of bank lending data shows that the areas they direct finance to increasingly lie outside of the real economy. Instead of using their profits to support neglected small businesses or struggling households, banks are using them to boost shareholder payouts and inflate their own stock prices. Banks cannot reasonably claim that higher taxes would hamper their investment in the UK when the ‘big four’ diverted over £33 billion to shareholders last year.

Share your thoughts. Contribute on this story or tell your own by writing to our Editor. The best letters every week will be published on the site. Find out how to get your letter published.

Yes, banks should be profitable. But there is a world of difference between profiting and profiteering. The money and payment services banks provide are an essential public utility, like energy. Just as energy companies weren’t allowed to profiteer from increases to the cost of living, nor should banks be. Taxing the windfall profits of banks makes just as much sense as it did for energy companies.

• SHARE: If you have anything to share that we should be looking into or publishing about this story – or any other topic involving Labour– contact us (strictly anonymously if you wish) at [email protected].
• SUBSCRIBE: Sign up to LabourList’s morning email here for the best briefing on everything Labour, every weekday morning.
• DONATE: If you value our work, please chip in a few pounds a week and become one of our supporters, helping sustain and expand our coverage.
• PARTNER: If you or your organisation might be interested in partnering with us on sponsored events or projects, email [email protected].
• ADVERTISE: If your organisation would like to advertise or run sponsored pieces on LabourList‘s daily newsletter or website, contact our exclusive ad partners Total Politics at [email protected].