Thursday 22 October 2026Tax The Budget Economy

Is Healey right to raise the bank surcharge back towards 8%?

In 30 seconds

The story

Healey is reported to be planning to raise the 3% bank surcharge in the 28 October Budget, possibly back to 8%, which the TUC says would raise £2.25bn a year.

The numbers

Banking-sector tax receipts were £39.1bn last year, of which the surcharge was £1.2bn. The OBR certified the 2021 cut from 8% to 3% as costing £1,020m in 2026-27.

My verdictPartly right

Reclaim the concession, but 8% on top of 25% is a harsher regime than before 2023, and the reported yield needs an OBR number behind it.

Why

What happened

John Healey, the Chancellor, is reported to have submitted a rise in the tax on bank profits to the official forecaster, the . The Budget is on 28 October.

The tax is the bank surcharge, charged on banking companies' profits on top of corporation tax. It has applied since 1 January 2016. The rate was 8% until the 2021 measure cut it to 3% for accounting periods beginning on or after 1 April 2023, as corporation tax rose from 19% to 25%. The allowance before the surcharge bites rose from £25m to £100m.

The TUC estimates a return to 8% would raise £2.25bn a year, the Guardian reported. HMRC figures published on 1 October show the surcharge raised £1.2bn in 2025-26, up 20.1%, within £39.1bn of total banking-sector receipts.

UK Finance, the trade body, responded that the sector already makes a major contribution to the public finances and faces materially higher tax rates than rival centres. The IMF, Reuters reported on 16 October, urged the UK to prefer property tax reform and a broader VAT base.

What's really going on

The timing is fiscal. The IPPR, a think tank, estimates the Chancellor's buffer against his borrowing rule has fallen by up to £15bn since the spring, GB News reports. The IFS shows how that headroom shifts with earnings forecasts, putting it at around £20bn in one illustrative case against £24bn in March.

The 2021 costing, certified by the OBR, put the cost of cutting the rate from 8% to 3% at £1,020m in 2026-27. That is under half the TUC's £2.25bn. The Treasury has published no costing of the new measure, and GB News reports that some experts dispute a £2bn estimate.

The profits base has grown. Banking-sector corporation tax rose 3.7% to £9.7bn in 2025-26 on higher UK profits. At 3% the surcharge raised £1.2bn, so 8% would add roughly £2bn before banks respond, close to the figure Bloomberg reported.

The constraint is the Treasury's own competitiveness test. The 2021 note said the 3% rate was meant to keep the sector's contribution sustainable without harming the UK's ability to attract mobile business. The cut took the combined rate on bank profits from 27% to 28%. Restoring 8% would mean 33%, six points above the pre-2023 regime.

The strongest case on each side

Why Healey should raise the surcharge

The 3% rate was a 2021 concession to soften the corporation tax rise; taking it back reclaims a sweetener rather than creating a new tax.
Higher profits drove surcharge receipts up 20.1% and bank corporation tax to £9.7bn last year, so the base can carry more.
The Treasury needs money: the IPPR says the Chancellor's buffer is down by up to £15bn, and the TUC says 8% would raise £2.25bn.

Why the banks say leave it at 3%

The Treasury's own 2021 note set the 3% rate to protect the UK's ability to attract and retain internationally mobile business and jobs.
KPMG puts the total tax rate on a UK bank at 46.4%, against 38.9% in Germany and 27.9% in the US, before any rise.
Every pound taken in surcharge is capital banks cannot lend; Barclays' chief executive argued in September that capital does more in lending and investment.

My verdict: partly right

Healey is right that the 2021 cut was a sweetener tied to the corporation tax rise. A sector whose receipts rose 8.5% to £39.1bn can pay some of it back. The banks' competitiveness case rests on an industry-commissioned comparison, not an official statistic.

The reported plan goes beyond reversal: 8% means a 33% combined rate, six points above the pre-2023 regime. The TUC's £2.25bn is more than double the £1,020m the OBR certified for the whole 2021 cut, and above the roughly £2bn that last year's receipts imply. Healey should also say what else rebuilds a buffer the IPPR estimates has fallen by up to £15bn.

What I'd do instead

I would reclaim part of the 2021 concession, show the arithmetic on Budget day, and publish the alternatives that were turned down.

Reverse half the 2021 cut and publish the costing on the day

Raise the surcharge to 5%, keep the £100m allowance, and publish the OBR-certified yield alongside the Budget.

How it would work: A Finance Bill clause sets the surcharge at 5% from 1 April 2027, leaving the £100m allowance unchanged. The combined rate on large banks' profits goes from 28% to 30%, three points above the pre-2023 regime.
What it costs: No official costing exists. At 3% the surcharge raised £1.2bn last year, about £0.4bn a point, so two more points would raise roughly £0.8bn before banks respond, a third of the TUC's figure.
Who it affects: Banking groups with UK profits above £100m, which is where all surcharge receipts come from. Building societies, credit unions and challenger banks below the allowance are untouched.
Tried before?: Yes. The surcharge was 8% from January 2016 until the 2021 measure cut it for accounting periods beginning on or after 1 April 2023, alongside the corporation tax rise.
The risk: It leaves most of the estimated £15bn fall in the buffer to other taxes, cuts or thinner headroom. Banks would still pay three points more than the 27% combined rate they faced before 2023.

If Healey insists on 8%, pay for part of it with a levy cut

If the Chancellor wants the full 8%, halve the bank levy from the same date so banks pay more in profitable years and less for holding liabilities.

Background: The 8% surcharge was introduced at the 2015 Summer Budget alongside cuts to the balance-sheet levy. The levy's rates have sat at 0.10% and 0.05% since 2021.
How it would work: Legislate the surcharge rise to 8% and halve both levy rates from 1 April 2027, with the OBR publishing the net yield of the pair in the Budget forecast.
What it costs: Halving the levy forgoes about £0.7bn of its £1.4bn, or about £25 of the OBR's £49 per household. The pair would net roughly £1.3bn before banks respond, well below the TUC's £2.25bn.
Who it affects: Banks with large balance sheets and thin UK profits gain; highly profitable UK retail banks pay more. Groups under the £100m allowance see only the levy cut.
The risk: Profits are cyclical and the levy is steady, so receipts become more volatile. A bad year for banks becomes a bad year for the Treasury.

Publish the Treasury's assessment of the reserves option

Alongside the Budget, publish the Treasury's assessment of raising money from banks through Bank of England reserve remuneration, including the Bank's response.

The problem: A Commons Library briefing of January 2026 documents the alternative of tiered remuneration on bank reserves at the Bank of England. The Budget is where the Treasury should explain choosing the surcharge instead.
How it would work: A short Budget annex sets out the estimated yield from tiering reserves, the Governor's June 2025 letter on reserve remuneration, and the Treasury's reasons for choosing the surcharge.
Who it affects: Treasury and Bank officials, who prepare the figures; banks, whose reserve income is in question; and MPs, who get a costed alternative.
What it costs: Nothing beyond officials' time. It raises no money itself; its value is that the next Chancellor inherits a published comparison rather than a rumour.
Tried before?: The Lords Economic Affairs Committee raised it in 2021. The Governor answered Richard Tice MP in June 2025. Neither is a Treasury costing published with a fiscal event.
The risk: Publishing a yield figure for tiering reserves could read as pressure on the Bank, which has said the decision belongs to government rather than to it.

The trade-off

On last year's receipts, either route raises roughly £0.8bn to £1.3bn before banks respond, well short of the TUC's £2.25bn. The Chancellor would still have to say what rebuilds the rest of his buffer, and the levy swap would make receipts more cyclical.

How we'd know it worked

The test is HMRC's autumn 2027 banking receipts release. If sector corporation tax and PAYE hold above this year's £9.7bn and £26.8bn, the warnings about lending and departures were overstated.

What to watch

The Budget on 28 October
The OBR's Budget-day costing of the bank measure
HMRC's next banking-sector receipts release, due in autumn 2027

Each of these is logged as an open call on my track record.