Reversing the bank surcharge cuts

The bank surcharge budget being prepared for 28 October may reverse the cuts to the levy made by Jeremy Hunt, a move that would raise upwards of £2bn a year. John Healey is believed to be minded to increase the surcharge banks pay on their profits, over and above corporation tax. Industry figures expect the rate to go back up to 8%, from 3% at present.

The TUC has pushed for a far more punitive increase, to 16%, saying that could raise £24bn in tax revenues over the next four years; its analysis puts a return to 8% at £2.25bn a year. An industry source said banks are resigned to the surcharge rising back to 8%.

The tax would land on a highly profitable sector: HSBC, NatWest, Barclays and Lloyds Banking Group alone generated £200bn in pre-tax profits over the past five years.

• Reversing Jeremy Hunt's surcharge cuts would raise upwards of £2bn a year
• The surcharge on bank profits is 3% at present; a return to 8% is widely expected
• The big four banks made £200bn in pre-tax profits over five years
• The TUC wants 16%, raising £24bn over four years

Why the Treasury needs the money

To keep the Treasury's deficit reduction plans on track in the face of rising government borrowing costs, Healey has decided to tap the financial sector. The UK's cost of borrowing has risen sharply in recent weeks, alongside that of other big economies, as bond markets respond to the prospect of higher inflation from the Middle East conflict.

Analysts suggested the higher borrowing costs could as much as halve the £24bn cushion Rachel Reeves had built up against Labour's fiscal rules at the time of the spring forecast. Healey is understood to be willing to accept a narrower "headroom", but is also keen to convince bond markets he is wedded to deficit reduction. Taxing banks more heavily is an option Reeves considered but rejected, wary of deterring future investment.

The industry pushes back

Bank bosses have been lobbying intensively against tax rises since narrowly escaping higher levies during last year's budget. The UK bosses of HSBC, Lloyds, NatWest, Barclays and Santander met Healey last week but were given no reassurance that bank tax hikes had been ruled out.

Lobby groups UK Finance and TheCityUK wrote to Healey warning that higher taxes would weaken investor confidence, damage the UK's attractiveness and force them to move staff and business out of the country. TheCityUK's head of policy John Godfrey said banks "do not want to get into debating the menu of taxation. The fact is that we don't want to eat in that restaurant."

An industry source said the sector was caught off guard by the messaging change, hours after Healey had called banks a jewel in the crown of the British economy. Speaking in Bangkok, the chancellor said banks "are hardwired into the economic fabric of this country and our future prospects".

Smaller and specialist banks, including Revolut and Shawbrook, want the profit threshold at which the surcharge kicks in raised from £100m to £500m. A government source said Labour was mindful of the UK needing to offer a positive environment for startup banks, especially the lending they offered to small businesses.

Political reaction and budget day

Conservative leader Kemi Badenoch cautioned against further banking tax rises during a visit to a financial services firm in Edinburgh on Thursday, saying the sector already faced a higher effective tax rate than in many other big global financial centres.

Shadow chancellor Andrew Griffith said: "Britain needs growth. But a raid on the financial services sector will stifle it." The TUC's Paul Nowak argued the opposite case: "Britain's big four banks are making a billion pounds a week, while bonuses have hit a post-crash record." And: "These are bumper profits, driven by high interest rates and households' mortgage misery. It's time to make sure banks pay their fair share."

The International Monetary Fund, which Healey met in Bangkok, has praised the UK's progress towards balancing the books, urging him to "stay the course".

Healey said he wanted his first budget as chancellor to give "breathing space" to both consumers and businesses. There will be little additional funding for Whitehall departments, which he said would have to stick to the budgets Reeves set out at her spending review in June 2025.

"You have to reprioritise if you want to do fresh things, or more," Healey said. The Institute for Fiscal Studies has said Reeves's plans could result in real-terms spending cuts for some departments in the later years of the spending review period.

• The budget will explain how the government will fully fund the four-year defence investment plan announced by Keir Starmer before he stepped down as prime minister
• It is expected to set out more details of plans to devolve income tax to mayoralties
• Healey is expected to avoid the question of when the UK will spend 3% of GDP on defence, the issue over which he resigned as defence secretary in June, contributing to Starmer's downfall

The final decision on the bank surcharge will be set out on 28 October, alongside the defence funding plans and the income tax devolution measures.