- Banks fear tax hikes if Labour leadership shifts left.
- Executives are already modelling scenarios beyond Starmer and Reeves.
- Borrowing costs near five per cent are tightening fiscal choices.
UK banks are starting to rethink the comfort they had after the last Autumn Budget.
The sector had narrowly avoided a tax increase after Rachel Reeves secured backing from lenders on boosting credit and supporting her fiscal plans. But that moment now looks less settled, as uncertainty grows around Keir Starmer’s leadership and the stability of the current Treasury team.
Several within the industry appear to be preparing for a shift. One senior executive at a large lender said banks “should be worried”, particularly after what they described as an “astonishing escape” last year, as quoted in a news report.
At least one Wall Street bank is already modelling different political outcomes. These include the possibility of a more left-leaning Labour figure replacing Starmer, as well as a scenario where Reform UK gains ground in the next election.
“We don’t think Starmer will last long,” the executive said, as quoted in a news report. “Everybody would like to keep Rachel Reeves as chancellor, but the odds of that seem slim.”
Higher profits, louder calls for a bigger cut
The concern is not coming out of nowhere.
Banks have benefited from higher interest rates, which have lifted margins and pushed up profits. That has, in turn, revived calls from Labour’s left to increase taxes on the sector.
Angela Rayner has previously argued for raising the bank surcharge to five per cent — a move estimated to generate around £1.5 billion a year. The surcharge was introduced at eight per cent in 2016 and later reduced to three per cent in 2022. Alongside this, banks also pay a levy on their balance sheets in addition to standard corporate taxes.
For now, there is no confirmed move. But one UK banking executive suggested that a weaker fiscal outlook could push ministers to revisit the idea of higher taxes.
At the same time, another executive reportedly argued the case for a sector-wide tax increase is less strong now, as banks are already increasing provisions. They added that Reeves would likely resist pressure for hikes as long as she remains in position.
Markets add to the pressure
Beyond politics, the economic backdrop is adding another layer of concern.
Investor unease around UK debt levels and political uncertainty has pushed borrowing costs higher, with ten-year gilt yields hovering close to five per cent — the highest among G7 economies.
That limits the government’s flexibility and increases the likelihood that tax rises could come back into consideration.
Banks and regulators are also watching for signs of market stress. There are concerns about a potential bond market sell-off, echoing the disruption seen during Liz Truss mini-budget.
One senior financial regulator warned that “the risk of a sovereign debt crisis is there”, adding that banks need to stress test interest rate risks on their balance sheets, as quoted in a news report.
For now, nothing has changed on paper. But inside the sector, the mood has shifted — from relief to quiet caution, as politics and policy begin to look less predictable.
Also read: Only 1 in 4 Sign Up to UK’s New Tax System Reform | EasternEye
