Autumn Budget 2026: Banks may be softest targets as Burnham refuses to rule out tax rises

The UK unexpectedly posted a £1.8bn budget deficit in July, defying expectations for a balanced budget and underlining the country’s precarious fiscal position just as global bond yields have moved to multi-decade highs. The recent rise in gilt yields, which is raising debt servicing costs and eating away at the Treasury's fiscal headroom, underscores the pressures on the Chancellor, John Healey, to raise taxes in the October Budget. Pressure to raise taxes will be fourfold - one ideological, two to buy fiscal headroom as spending rises, three to ease cost-of-living pressures and four to appease bond markets. 

This means it's likely that the Andy Burnham-led government, which seems to be more left-leaning than the Starmer/Reeves administration, will seek to raise taxes. 

When asked during his visit to Ukraine this week whether he would raise taxes to cover spending gaps, Burnham refused to rule out tax hikes. He said: “I won’t be unrealistic and people really need to understand that ... We are in a challenging position, whatever I do will be carefully thought through, it will be funded and there will be no more to come as we go into the Autumn.”

Given Healey says he will stick to a manifesto pledge not to raise the big three taxes on working people (NI, income tax, VAT), the Treasury lacks the main levers to pull and will look around for the softest targets - ie those who are deemed the most palatable revenue-raisers from the point of view of the broad (Labour) electorate.

Banks appear to be a likely target.

Britain’s big four high street banks (Lloyds, HSBC, Barclays and NatWest) generated £200bn in profits in the last five years, which has left lenders exposed to attack and maybe more vulnerable to additional tax burdens than at any time since the 2008/09 period. Indeed, shares have jumped to the highest since the global financial crisis. Calls are growing to tax the sector more - the Green Party urged the Chancellor to impose a 38% windfall tax.  

UK banks currently face one of the highest tax regimes among developed countries. In addition to paying the main corporation tax rate of 25%, UK banks pay an additional 3% surcharge 

But this levy is down from 8% in the past – a return to this level is not out of the question, although today’s higher rate of corporation tax (up from 19% to 25% in 2023) means a rise to 5-6% is more likely. This would take the combined corporate tax burden to 31%. Any % increase in the surcharge would likely hit earnings per share by a similar or slightly greater level, lowering profits, return on equity and potential dividends or buybacks.

Already UK banks face a higher rate of tax than elsewhere. Lobby group UK Finance data shows UK banks were taxed 46.4% when employment taxes and VAT is taken into account, vs 38.9% rate in Frankfurt and 27.9% in New York. 

There are strong countervailing arguments to raising bank taxes. One of these is hobbling UK's competitiveness vs the likes of Frankfurt and NY, which could further narrow the tax base by attracting labour and capital away from the City. The other major worry is that raising taxes on banks would hurt lending to businesses and consumers. However, given the fiscal position and ideology it looks like bank taxation is a relatively low-hanging fruit for the Burnham/Healey regime.