Shares in Britain’s largest banks dropped sharply on Friday after a prominent think tank urged the government to impose a windfall tax on banking profits, a move that could raise up to £8 billion a year.
The Institute for Public Policy Research (IPPR) said the measure was necessary to offset losses from the Bank of England’s quantitative easing (QE) programme, which is currently costing taxpayers around £22 billion annually. The call immediately unsettled markets, with NatWest and Lloyds falling by more than 4% each and Barclays down over 3% in early trading, making them among the biggest losers on the FTSE 100 index.
The Treasury has yet to comment on the proposal, but the reaction underscored investor concerns that such a policy could mark the end of record profits and generous shareholder payouts for Britain’s banks.
The IPPR report argued that banks have benefited disproportionately from QE, which was introduced to stabilise the economy after the global financial crisis and expanded during the pandemic. Under QE, the Bank of England purchased government and corporate bonds, but as it unwinds the programme, it is selling them at a loss and paying higher interest on reserves held by banks.
Carsten Jung, associate director for economic policy at IPPR and a former Bank of England economist, said taxpayers were unfairly shouldering the cost. “Public money is flowing straight into commercial banks’ coffers because of a flawed policy design. While families struggle with rising costs, the government is effectively writing multi-billion-pound cheques to bank shareholders,” he said.
According to the IPPR, bank profits have risen by around £22 billion since before the pandemic. It argued that a targeted levy on windfall profits would still leave banks with “substantially higher” earnings while easing the burden on the public purse.
The proposal has drawn pushback from the industry. Lloyds chief executive Charlie Nunn previously warned that raising taxes on banks would undermine efforts to strengthen the UK economy and financial services sector. Trade body UK Finance also stressed that British banks already pay a surcharge on corporation tax as well as a separate bank levy, warning that further taxation would harm the UK’s global competitiveness.
Russ Mould, investment director at AJ Bell, said the suggestion of a new levy had rattled investors. “The timing of the tax debate, fuelled by the IPPR report, is unfortunate given it coincides with a new poll from Lloyds suggesting a rise in business confidence, despite cost pressures,” he noted.
With the government facing pressure to plug fiscal gaps while households continue to grapple with high living costs, the question of whether banks should shoulder more of the burden is likely to remain a flashpoint in the run-up to the next Budget.
