After recent political instability, banks are worried that Prime Minister Keir Starmer might be replaced by a Labour leader that is more likely to tax them. In the November Budget, banks narrowly avoided tax raises after Rachel Reeves managed to secure alternative commitments by banks to boost UK lending.

As it stands, in addition to having to pay standard corporate taxes, banks have to pay a 3% surcharge on their profits. Last year, the former deputy Prime Minister - Angela Rayner - suggested increasing this surcharge on banks to 5%, which would raise an additional £1.5 billion annually. Banks are extra vulnerable at the moment given their recent surges in share value (due to high interest rates).

Analysis

Banks are uniquely vulnerable to political stability because of their political unpopularity and high profitability. This is driven by previous financial crises, where banks have always acted as the final trigger. As such, instead of being met with gradual tax changes, banks have to anticipate more sudden surcharges to be applied to their profits and act accordingly.

The November Budget highlights this issue, with a senior bank executive describing a lack of extra taxation on the banking sector as an ‘astonishing escape. ’ Even then, banks were subject to a transactional compromise which likely only panned out in the banks’ favour because their support was so essential to propping up Rachel Reeves’ fiscal plans.

What could a change in leadership mean for UK financial services?

• UK banks face a higher political risk than other industries, where tax burdens could increase dramatically, and this in turn would depress share prices as investors become uncertain

• Political instability may weaken the UK’s international competitiveness on banking, as mobile banking services means banks can shift their operations to the EU or US

• Banks must maintain expensive governmental relations to ensure no detrimental treatment, which diverts resources away from productive business expansion activities