Major UK lenders are experiencing growing frustration over the UK’s tax burden on banking profits. This comes prior to the Chancellor’s Autumn Budget, where a new tax on banking profits is being considered as a means of covering rising government borrowing costs.

David Postings, head of a UK banking lobby group, argues that the sector is already taxed heavily enough. As it stands, UK banks already hand over close to 50% of profits in tax, the highest rate for the sector when compared to competing jurisdictions like Amsterdam and New York.

Analysis

This development represents a policy trade-off: the government is taxing a highly profitable sector in order to plug a funding gap, but this is at the risk that major banking players may take their business elsewhere. Combined with other factors like heavy regulation and Brexit, London is becoming increasingly unattractive for large banks.

What does this mean for the sector?

• The government is having to confront the short-term pressure of balancing its own Budget with the long-term pressure of eroding London’s place as a global financial hub

• Rival financial hubs like Frankfurt are proactively cutting tax rates in order to attract these very banks, so the UK’s response to this risk will have to be strategic

• There will likely be an increase in advisory legal work, with firms helping banks map out relocation scenarios or think about restructuring European operations