Autumn Budget – deep dive into the impact for UK Banks

UK banks are heading into the Autumn Budget with a target on their backs.

After a run of strong profitability, lenders look like an easy source of revenue as Chancellor Rachel Reeves hunts for ways to plug a fiscal gap without breaking household tax pledges.

But any changes to the status quo risk clashing with the government’s ambition to make financial services a cornerstone of growth.

Here, we explore how the UK’s largest banks could be impacted by potential changes.

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Why the Autumn Budget might target banks

You don’t lose too many voters by going after banks that are printing record profits. Britain’s biggest lenders are on track to deliver another bumper year, with combined pre-tax profits expected to hit around £52.6bn over 2025.

Higher interest rates have fattened margins, while banks have returned billions to shareholders through dividends and buybacks. Against this backdrop, it’s easy to see why the Chancellor might view the sector as a convenient source of revenue.

But taxing success comes with risks – healthy banking profits are good for everyone in the long term.

Where could the Treasury raise revenues?

UK banks are no strangers to extra taxes.

Alongside the standard 25% corporation tax, they pay a 3% banking surcharge and two annual levies – the Bank Levy (typically £100-200mn for the large banks) and the Bank of England Levy (around £100mn).

UK corporation tax was changed in 2023, rising from 19% to 25%. To help the banks, the UK Government cut the banking surcharge from 8% to 3%.

The surcharge might be the easiest route for a tax hike – the mechanisms are already in place, and they’ve already been higher in recent history. Reports suggest that an increase of 2%, taking the surcharge to 5%, would be the most likely outcome.

The other route could be to remove interest paid on reserves held with the Bank of England (BoE).

This is perhaps the more controversial route as it’s a key tool that the BoE uses to enact its monetary policy. Without going too deep on this, it could limit the BoE’s ability to influence the economy through mechanisms like interest rate changes.

Now that the background is covered, let’s look at how changes to the surcharge and interest on reserves could impact banking profits.

Surcharge hike

The surcharge is only charged on profits within the UK corporation tax net – essentially the earnings of UK-banking entities. That means not all banks would be impacted to the same degree, those with a large overseas presence would be sheltered to some degree.

After a £100mn allowance, UK profits are hit with the surcharge, on top of the 25% corporation tax rate.

We’ve modelled the impact of a 2% increase to the surcharge from 3% to 5%.

Changes to interest on BoE reserves

Interest paid on reserves held with the BoE has spiked in recent years as interest rates have risen.

It may look like an obvious way to claw back some cash. But there’s no easy route to changing the current system, and a full-scale cut of interest on reserves would cause more harm than good.

If any change is coming, it's more likely to be like how things are done in Europe. The European Central Bank operates a tiered structure, with a minimum reserve level set to 1% of deposits (plus some other bits) that receives no interest.

If we assume a similar structure, with UK banks forced to hold 1% of their deposits earning no interest, the potential profit impact is detailed below.

How will the Banks take it?

UK banks are already taxed at higher rates than many overseas peers, and major CEOs have been vocal in making this clear.

Just last year, JPMorgan CEO Jamie Dimon warned the UK Chancellor that any further tax increases could prompt the US giant to reconsider its UK operations.

PwC’s analysis of a model bank operating across different jurisdictions shows London already sits at the top of the global tax list.

The endgame

We think UK banks look like easy targets for the Chancellor but remain cautiously optimistic that the government will consider the bigger picture. Healthy banks are a key driver of economic growth, and UK institutions are already carrying a heavier tax burden than many global peers.

That said, our modelling suggests that even if changes do materialise, the impact on next year’s profits should remain very manageable.

More broadly, we remain constructive on the sector’s outlook. Valuations aren’t as compelling as they were at points last year, but we still see further upside on offer.

In our view, the key risks lie more in the soft economic environment than anything the Autumn Budget might deliver. As ever, there are no guarantees.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.

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