Shares of major U.K. banks fell on October 16 after reports that the government is preparing to raise the tax surcharge on the profits of London-listed lenders. Investors now expect Finance Minister John Healey to unveil the change in the budget due on Oct. 28.
During trading, Lloyds Banking Group shares dropped 1.8% and NatWest fell 1.51%. Barclays, which was also lower earlier in the session, later turned up 0.13%. By contrast, London-listed HSBC and Standard Chartered gained 1.2% and 0.71%, as a large share of their earnings comes from overseas.
According to the reports, the sector-specific surcharge on banks, charged on top of corporation tax, could be lifted to 8% from 3%. The rate had previously been cut from 8% to 3% in 2023 under Rishi Sunak's Conservative government. KBW analysts estimate the increase could raise around £2 billion ($2.67 billion) a year for the U.K. Treasury, but also reduce lenders' earnings by about 6%.
In an interview with Bloomberg, John Healey described banks as the “jewel” in the U.K. economy. Even so, the proposal has revived broader concerns about the Labour government's approach to financial services. Aviva CEO Amanda Blanc told CNBC that financial services are one of the country's “core industries” and warned against making it harder to invest in the U.K. or for U.K. businesses to invest at home.
PwC data show U.K. banks face a total tax rate of more than 46%, compared with 38.9% for banks in Frankfurt and about 27% in New York. Citi analysts said the budget could overshadow upcoming third-quarter earnings, but may also act as a “clearing event” by reducing uncertainty for the sector. They added that bank fundamentals remain healthy, with adjusted pretax profit at Barclays and NatWest potentially coming in above market expectations.
