£32bn windfall boosts bank tax: Raid on interest rate hike windfall could be used to plug £40bn hole in public finances

  • Creditors are a tempting target for Chancellor Jeremy Hunt
  • Alison Rose-led NatWest will suffer the most from the surprise raid
  • NatWest has £148bn in the Bank of England, HSBC has £89bn and Lloyds £79bn

Target: Alison Rose heads NatWest, which would be hardest hit by the tax raid

High street banks face the prospect of billions of pounds in extra tax claims as they announce big profits this week.

Lenders are a tempting target for Chancellor Jeremy Hunt, who is under pressure to plug a £40bn hole in the public finances.

Over the next two years, banks expect to pay out up to £90bn on deposits at the Bank of England worth around £900m. As The Mail on Sunday reported earlier this month, creditors are seeking the Treasury to block some of those payments, which would amount to a windfall tax.

The political upheaval means there is no certainty that Hunt will remain in No 11 for long, but whoever becomes chancellor is likely to find it difficult to resist bank tax grabs.

Sir Paul Tucker, the former deputy governor of the Old Lady, proposed the move to help balance the UK’s balance sheet. In addition, Hunt may decide to keep the levy on banks in 2015 as punishment for their reckless behavior that led to the financial crisis.

Big lenders will receive £32 billion this year, slightly more than in 2021, according to JPMorgan research. Profits on this scale will surprise millions of customers suffering from the cost of living crisis.

HSBC, Lloyds, Barclays and NatWest are due to publish their third quarter results this week. They have benefited from higher interest rates, but are accused of failing to pass on the benefits to depositors, who continue to receive meager returns.

NatWest, led by chief executive Alison Rose, will suffer the most from the surprise raid, according to analysts at Barclays. NatWest holds £148bn in the Bank of England, while HSBC has £89bn and Lloyds £79bn. These reserves were largely built up as part of the Bank of England’s money printing, known as quantitative easing.

As the base rate rises, the interest that must be paid to the bank increases, meaning a large windfall. The Institute for Fiscal Studies suggested keeping some of that. According to Tucker, this could save the public purse between £30bn and £45bn in each of the next two financial years.

Barclays estimates that reserves have increased by £160bn over the past three years, with NatWest accounting for half of that growth. Hunt said he is not opposed to windfall taxes in principle.

Banks hoped to pay less tax, not more. They had been expecting tax cuts, but after a series of reversals by chancellors, that may not happen.

Rishi Sunak promised to reduce the levy from 8 to 3 percent on top of the 25 percent corporate tax, bringing the tax rate for banks to 28 percent.

Kwasi Kwarteng proposed an 8 percent surcharge on top of the 19 percent corporate tax rate, or a total of 27 percent. Hunt is proposing a corporate tax rate of 25 percent, so if he keeps it at 8 percent, banks face a 33 percent corporate tax rate.

While there may be little sympathy for lenders, experts warn that taxing them heavily could have consequences. Banks are more likely to face losses on bad loans as customers find themselves in dire straits during the economic crisis.

A report by Bloomberg said that raising taxes on banks could cause them to refuse to lend, which in turn could hurt an already weak economy.

David Postings, chief executive of trade body UK Finance, said: “We urge the government to consider the surcharge very carefully and not to jeopardize the competitiveness of the UK’s banking and finance industry, which is the engine of the economy, delivering jobs and investment up and down the country.” .

Markets are betting that the cost of borrowing could rise by as much as a percentage point in early November to 3.25 percent, further increasing the interest banks charge on their reserves.