Introducing The Regulatory Perimeter, our new Substack

Partner Anthony Thompson, Director Michael Johnson and Consultant Lydia Brown have joined forces to launch The Regulator Perimeter, a fortnightly Substack newsletter on the policy and regulation shaping UK financial services.

For a taste of what is to come, check out a snippet of our first article: Not another bank tax article

Last month, the Chancellor, John Healey, went looking for money to fund his Budget pledges and found an easy political target – the UK banking sector.

From 1 January 2027 to 31 March 2028, the bank surcharge will double from 3% to 6%. That takes the combined rate on bank profits to 31%. The OBR expects it to raise about £1.5 billion over the time-limited 15 months. Although, we’ve heard ‘time-limited’ before. See William Pitt’s ‘temporary’ income tax, introduced to fund the war with France. Or alternatively British schools…

Unsurprisingly, the banks lobbied against it before the Budget and have grumbled about being targeted since.

But do they have a point? Is taxing bank profits more really a bad thing? And why stop at the banks? For an entirely theoretical moment, why not target the whole, very profitable financial services sector, if you’re the Chancellor? *

I think I’ve seen this film before…

Banks open the act by suggesting that any proposed tax hikes should not hit them on the grounds that higher taxes raise the cost of lending. Critics enter stage left to make the point that banks’ profits are pretty high, so the banks can definitely afford it when no one else can. A predictable back and forth ensues. This film has had more iterations than the Fast and the Furious franchise.

This year the finale of the film was the banks being hit but not as hard as was trailed – a three-percentage point increase in the surcharge over a time-limited period. Cut to a post credits sequence with positive Q3 results announcements from Lloyds Banking Group (pre-tax profit nearly doubled the day after the Budget), HSBC (a 32% increase year-on-year), Barclays (a 12% increase).

Curtains close. You head home with a nagging sense of déjà vu.

However, there is a better argument the banks could make – not all profit is created equal

A better measure of what a sector adds to the economy is the quite technical gross value added (GVA). It measures the output a sector produces, and it sits behind jobs, wages and growth. And here’s the interesting part. Strip out the rest of the financial services sector, and the UK banking sector’s contribution to GVA has not grown since the financial crisis. Profits have recovered, the sector’s economic output has not.

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