UK Bank Shares Rise Amid Expectations of Tax Reprieve in Reeves’s Budget

UK bank shares rallied on Tuesday as growing confidence spread through the City that the chancellor, Rachel Reeves, will spare lenders from fresh tax hikes in tomorrow’s budget. The move has lifted sentiment across the FTSE 100, marking a significant shift after months of uncertainty over whether Labour would impose additional levies on the banking sector.

The optimism followed reports that the Treasury had asked major lenders to issue supportive statements ahead of the budget – a signal interpreted by many analysts as evidence the government is preparing to hold off on further taxation of the sector. By mid-morning trading, shares in Lloyds were up 3.8%, NatWest rose 3.7%, and Barclays climbed 2.3%, helping to drive gains across the wider index.

Dan Coatsworth, head of markets at AJ Bell, said the news underlined the sense that the Treasury may be backing away from previously floated measures targeting the sector.

“Reports that UK banks might get a reprieve in this week’s budget from previously floated new tax measures underpinned the FTSE 100’s rise on Tuesday,” he said. “It suggests that some intense lobbying by the industry has paid off, although U-turns have been a theme in UK politics for some time so banking boardrooms may not breathe a full sigh of relief until Rachel Reeves has sat down tomorrow afternoon.”

Months of Uncertainty Over Tax Plans

Speculation over a potential tax increase for banks has been swirling for months, reignited in August when the Institute for Public Policy Research (IPPR) proposed a new levy to recoup money that lenders earn from the Bank of England as a result of quantitative easing programmes launched after the 2008 financial crisis.

Those programmes were designed to stabilise the financial system and the wider economy during periods of extreme stress. However, commercial lenders accrue significant interest payments on reserves held at the Bank of England – a dynamic that some economists and campaign groups now argue warrants a windfall-style intervention.

The proposal resurfaced amid difficult fiscal choices facing the new Labour government, particularly after the Treasury abandoned plans to increase income tax rates in a move widely viewed as diverging from Labour’s manifesto commitments.

According to industry sources, that reversal raised renewed fears that banks could instead be targeted with a sector-specific levy. As recently as last week, some lenders believed the option remained firmly on the table.

Industry Lobbying Intensifies

UK banking executives have argued vigorously against any increase in their tax burden, insisting that lenders already pay among the highest effective tax rates of major financial centres.

Industry groups claim that once corporation tax, the bank surcharge, employer national insurance contributions and VAT are taken together, UK banks face a combined tax rate of roughly 45.8%. By comparison, the figure stands at around 38.6% in Frankfurt and 27.9% in New York – a differential that banks say could make the UK a less competitive place to operate.

Senior executives have also argued that further taxes could force them to curb lending at a time when the government is relying on the banking sector to play a central role in its growth plans. The chancellor’s “Leeds reforms,” unveiled this summer, aim to spur financial-sector investment by easing certain regulatory requirements. Banking lobbyists contend that a tax rise would undermine that agenda.

Despite these warnings, Reeves and her advisers had kept their options open in recent weeks – a position that sustained market jitters until this week’s unexpected shift in tone.

Financial Times Story Calms Market Nerves

The rally in bank shares followed an overnight report by the Financial Times suggesting the Treasury had privately asked lenders to prepare supportive public comments on the budget, with expectations that banks would avoid a tax raid.

That leak appears to have been enough to reassure investors that ministers are stepping back from the most aggressive proposals. Market analysts said the signal, though subtle, reflected a pragmatic recognition within government of the economic risks associated with punishing the sector at a sensitive moment for the UK economy.

In the face of sluggish growth, high borrowing costs and an uncertain global outlook, the Treasury remains under pressure to encourage investment and protect the stability of the financial system – both of which could be dented by a heavy-handed approach to bank taxation.

Campaigners Continue to Push for Higher Taxes

Despite the sigh of relief across the Square Mile, campaign groups and some Labour MPs continue to demand a tougher stance.

Positive Money, a pressure group focusing on monetary reform and financial sector accountability, said it had gathered 68,749 signatures in support of a windfall tax on bank profits. It argues that banks have benefited disproportionately from the current monetary framework and should therefore contribute more to the public purse, particularly during a period of intense fiscal strain.

The group claims that applying a 38% charge – equivalent to the windfall tax placed on energy companies – could raise more than £14bn for the Treasury. That sum, it argues, could be used to bolster funding for health, education, housing and other areas of public spending that have been hollowed out by a decade of austerity and subsequent economic shocks.

Simon Opher, the Labour MP for Stroud, is among those leading the call for a clampdown. He will deliver Positive Money’s petition to Downing Street this week and said the public strongly supports the idea of extracting more from the sector.

“This week’s budget is an opportunity to restore the public services that form the backbone of our society, but are no longer working for ordinary people after years of being cut to the bone,” he said.

“Recouping the huge payments that are being made from the public to the banking sector is a fair and commonsense way to fund this, and will only strengthen our economy by allowing us to invest more in health, education and communities.

“I urge the government to listen to the thousands of members of the public who have signed this petition and are calling to make our economy fairer.”

Budget Looms as Reeves Faces Balancing Act

For Rachel Reeves, the decision represents a delicate political balancing act. On one side are the demands of fiscal responsibility, the need to rebuild public services, and pressure from Labour’s own MPs and supporters to ensure Britain’s largest institutions pay their “fair share.” On the other is the Treasury’s desire to maintain economic competitiveness, shore up investor confidence and avoid damaging the UK’s standing as a global financial centre.

The chancellor must navigate a narrow path: one that allows her to fund public spending priorities without triggering a negative reaction from markets still sensitive to political signals after years of turbulence, from the aftermath of Brexit to the 2022 mini-budget crisis.

If Reeves does indeed grant banks a reprieve, it may reflect an understanding of the sector’s role in bolstering economic growth – but it may also spark criticism from those who believe the financial industry has yet to fully account for its outsized influence on the UK’s economic landscape.

What Investors Will Watch on Budget Day

While Tuesday’s rally demonstrates market optimism, analysts warn that nothing is guaranteed until the chancellor delivers her speech. Investors will be watching for several key indicators:

Confirmation of no new bank-specific tax measures, particularly around excess reserve interest or levies linked to quantitative easing.
 

Signals of long-term tax stability, which banks say are crucial for planning and investment decisions.
 

Further details on the Leeds reforms, including any measures reducing regulatory friction for lenders.
 

Statements on public spending and borrowing, which could influence broader market sentiment and indirectly affect the financial sector.
 

A surprise tax announcement – or even ambiguous language – could spook markets, given the volatility seen in recent years.

A Brief but Significant Rally

For now, the surge in bank shares offers a rare moment of relief for the sector. After years of restructuring, regulatory change and fluctuating economic indicators, the prospect of avoiding a fresh fiscal squeeze has brought renewed confidence to a cornerstone of the UK economy.

But with political pressures intensifying and public services under strain, the battle over bank taxation is far from over. Tomorrow’s budget will provide the clearest signal yet of whether Reeves intends to prioritise stability for the financial sector or heed calls for a more redistributive approach.

Either way, the outcome will send ripples through markets, boardrooms and Westminster alike – setting the tone for the government’s relationship with one of the most powerful and closely watched industries in Britain.

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