Chancellor John Healey is planning to increase taxes on the banking sector, senior banking executives have told the BBC.

Healey has described banks as part of ‘the crown jewels’ of the UK economy. However, leaders in the sector say banks will be ‘on the menu’ at the Budget in two weeks’ time.

The four biggest banks made about £15bn in profit in the first six months of this year. Trade unions have called for them to face additional taxes.

The trade body UK Finance warned that ‘further increases in bank taxes would weaken competitiveness, discourage investment and job creation, and work against the government’s ambition to deliver growth in every postcode’.

What could be in the Budget?

The UK’s biggest banks and building societies currently pay a 3% surcharge on top of the baseline 25% rate of corporation tax, which is a tax on profits. They also pay a levy on the assets held on their balance sheets.

The sector contributed nearly £40bn to the Treasury last year, including income tax paid by employees. The bank levy raised £1.4bn last year, and the surcharge raised a further £1.2bn.

There are several ways the chancellor could raise more money from the sector. The surcharge was reduced from 8% under Rishi Sunak, at the same time as corporation tax was raised from 19% to 25%. Returning the surcharge to its previous level could raise around £2bn a year.

The bank levy is not linked to profits. It charges banks based on the size of their balance sheets, currently at 0.1% on outstanding short-term loans and 0.05% on longer-dated loans. Mortgages are excluded from the calculation.

In the past, banks have argued successfully that higher taxes would make the UK less competitive with other countries and reduce their ability to lend, which would harm growth.

Expert view

Sir Philip Augar, an author and former banker in the City of London, told the BBC’s Today programme that there was ‘room for a moderate increase’ in taxes on the sector. He said such a rise could raise up to £3bn a year.

He said lenders are enjoying ‘booming conditions’, benefiting from higher interest rates that boost their profits. Rising interest rates have widened the gap between the rate banks charge borrowers and the rate they pay savers.

Sir Philip added that when the sector ‘hits really rocky times it expects the taxpayer to bail them out’, but when it hits boom times ‘it expects some kind of special treatment’. He said banks cannot be ‘too big to fail and too big to tax’.

Paul Nowak, general secretary of the Trades Union Congress, said most bank workers ‘are not fat cats or city high rollers’. He added that ‘we want a successful financial services industry in the UK’.

‘But if the chancellor does ask the banks to pay a fairer share of tax in the Budget, that’s 100% the right call,’ he said.

Banks were pleased to avoid being targeted at the last Budget, given the large profits they have made in recent years.

Other options under discussion

Treasury officials have also discussed another option. At present, banks can use past losses to offset their profits, which reduces their tax bill in a given year. Lloyds in particular has benefited from this rule, as losses from the financial crisis have been used to lower its tax bills for years.

Some analysts and bank executives have proposed suspending this practice for a few years. This could bring an estimated extra £1bn a year for the Treasury. One bank executive described it as ‘a lot more bearable’.

This option would also spare foreign banks from an additional hit. JP Morgan chief executive Jamie Dimon has warned that the UK already has one of the highest tax burdens on banks in the world. He said adding further sector-specific taxes could discourage investment and damage competitiveness.

Industry leaders say any tax rise that hits UK banks but exempts the UK operations of foreign banks would be hard to reconcile with the government’s push to back British business.