UK banks' record tax bill as profits soar - but analysts warn against raising taxes

UK banks paid out a record-breaking amount in taxes last year, following a surge in profits.

The gap between taxation on the City and other global financial hubs is widening, according to recent figures. This comes amid growing speculation of potential tax rises ahead of the forthcoming statement.

The total tax contribution from the UK banking sector reached £44.8bn for the financial year ending in March, accoding to analysis by PwC for trade group UK Finance. This figure surpasses last year's £41bn, marking the highest contribution since the study began ten years ago.

It means that banks contributed roughly 4.7% of the total amount the Government received in taxes last year. Data from 41 banks, both UK-based and international, revealed their payments to HMRC over the latest financial year.

Of the total amount, £24.1bn ame from direct taxes, including corporation tax, the bank levy, a surcharge on banks’ profits, and employer taxes. This was higher than last year, primarily driven by the sector generating more taxable profits.

Major British banks such as Lloyds and HSBC were among those to make record annual profits last year, with higher interest rates helping them generate more income from borrowers. To a lesser extent, a one percentage point net increase in the combined corporation tax and surcharge rate to 28% for the latest year helped drive up contributions.

Some £20.7bn of the total contribution came from taxes collected, including schemes like income tax and national insurance which banks, like other employers, collect on behalf of their employees. The report highlighted a growing disparity between the tax contributions of UK banks compared to those in other leading global financial centres.

PwC's modelling showed that the total tax rate for a model bank operating in London was 45.8% over the latest financial year, significantly higher than the 27.9% for a bank operating in New York. Total tax rates in other top European financial hubs – 28.8% in Dublin, 38.6% in Frankfurt, and 42.0% in Amsterdam – were all notably less than the previous year, according to PwC’s analysis.

This was primarily due to the suspension of contributions to the ’s (EU) Single Resolution Fund at the start of 2024, the report said. The EU collects fees to cover emergency funding for banks that come into trouble, to avoid taxpayers bearing the brunt of failures.

The fund reached its target level of contributions by the end of last year, 78 billion euros (£65bn), meaning it stopped collecting money in 2024. London’s total tax rate is forecast to remain higher than all other locations analysed in 2025.

With the UK Government set to announce its Budget statement next week, there has been growing speculation over possible tax changes to help cover shortfalls in public finances.

Gary Greenwood, a research analyst at Shore Capital Markets, warned that the Government should "think long and hard" about potentially hiking taxes for banks. He argued that while the public might not resist higher taxes on banks, these institutions already face a hefty tax load globally, and such a move could hinder economic growth, which the Government is keen to promote.

David Postings, chief executive of UK Finance, echoed this sentiment, highlighting that "The overall tax environment has an important bearing on investment decisions and growth and is something that needs to be considered in terms of our international competitiveness."