City responds to UK bank tax raid rumour

The on-off reports of a Budget-day tax raid on UK banks today left Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) mired in uncertainty and significantly cheaper than recent multi-year highs.

Lloyds shares peaked at 95.8p last Wednesday but have since fallen 8%, while NatWest is down 7% from last week’s 624p as weaker stock market conditions have been compounded by speculation over the contents of next week’s speech by Chancellor Rachel Reeves.

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HSBC Holdings (LSE:HSBA) and Barclays (LSE:BARC) have also fallen 6% and 7% respectively, a slide that accelerated on Tuesday as investors digested the latest developments in the Budget rumour mill.

The Telegraph said that UK bank taxes are once again being considered by Reeves, with an increase in the current 3% tax surcharge on bank profits over £100 million the likely method.

The speculation skewered relief over a Financial Times report earlier this month that said Reeves was not considering a tax hike because she wanted the sector to remain competitive and able to support the country's growth.

Analysts at UBS today published their thoughts on the Telegraph report, which it calculates could imply an additional cumulative hit of £554 million based on a two-percentage point rise in the surcharge.

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This would compare with £633 million in relation to 2024 results, when payments to the Treasury ranged from £91 million for Barclays to £215 million for HSBC. Lloyds and NatWest, who generate most of their profit in the UK, paid £157 million and £169 million respectively.

UBS said bank taxes of moderate size and applied in a uniform fashion are an input cost shock, which a rational industry with pricing power would pass to customers over time.

It added: “A growth economy needs a lower hurdle rate, in our view.”

The bank regards the potential tax developments as a cost of equity issue, rather than one affecting the long-term outlook for earnings per share. It notes the UK domestic banks trade at 7.3 times 2026 earnings forecast, which is a 13% discount to the wider sector.

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UK banks already pay high levels of tax by international standards, including a levy of 0.10% on certain balance sheet liabilities as well as corporation tax at 25% and the 3% surcharge.

It was for this reason that the Financial Times reported that Reeves wanted to avoid further tax rises. Instead, she was said to be in favour of pressing banks to demonstrate a willingness to grow even faster than they are doing in order to support the economy.

Shore Capital said this month that any tax reprieve was unlikely to be a “free lunch for banks and their shareholders”, noting that some of the benefits would be gobbled up by keener pricing.