Should Banks Pay More Tax? The UK Debate and Lessons for Australia

Britain is considering a substantial increase in taxation on its banks, reviving a fundamental economic question: who ultimately pays when governments impose additional taxes on financial institutions?

Ahead of the UK Budget on 28 October, the government is reportedly considering increasing the bank profits surcharge from 3% to 8%.

The proposal has generated strong opposition from banks and a warning from the International Monetary Fund. But supporters argue that banks enjoying substantial profits should contribute more to government revenue.

New taxation figures released on 1 October provide useful evidence for examining the competing arguments.

How does Britain tax its banks?

British banks face three principal corporate taxes.

First, they pay the standard 25% corporation tax on taxable profits.

Second, they pay a 3% bank surcharge on profits exceeding a £100 million annual allowance. The surcharge was introduced at 8% in 2016, then reduced to 3% in April 2023 when the standard corporation-tax rate increased from 19% to 25%.

Consequently, the combined headline rate on large banks increased from 27% to 28%.

Third, banks pay a separate bank levy, calculated on specified balance-sheet liabilities and equity rather than profits. The annual rates are 0.10% on short-term chargeable funding and 0.05% on long-term chargeable funding.

The proposed surcharge increase would take the headline profits-tax rate to 33%, before the separate bank levy and other taxes.

How much tax do British banks already pay?

HM Revenue & Customs reported that the banking sector generated £39.1 billion in tax receipts during 2025-26, an 8.5% annual increase.

This comprised:

• £26.8 billion in employee income tax and National Insurance contributions collected through payroll, including employer contributions.
• £9.7 billion in corporation tax.
• £1.4 billion from the bank levy.
• £1.2 billion from the bank surcharge.

An important distinction: the £26.8 billion includes taxes on employees' earnings and should not be presented entirely as taxes borne by banks themselves.

The remaining £12.3 billion represents corporation tax and the two bank-specific taxes.

What would the increase mean in practice?

Consider a banking group earning £1 billion in annual taxable profits.

Under current arrangements, it pays £250 million in corporation tax and £27 million in surcharge, after allowing for the £100 million surcharge exemption.

Total: £277 million.

Increasing the surcharge to 8%, while retaining the allowance, would increase its total profits tax to £322 million.

That represents an additional £45 million annually, assuming unchanged profits and tax bases.

For shareholders, that is £45 million less in after-tax earnings before any changes in business behaviour.

Who actually bears the additional tax?

This is the critical economic question.

Initially, a profits-tax increase reduces returns to bank shareholders. However, banks may subsequently respond through higher lending rates, lower deposit rates, reduced operating expenditure or changes to investment decisions.

The outcome depends on competition, demand and banks' ability to adjust prices.

Banks also rely on retained earnings to generate capital internally. Lower retained profits can eventually constrain balance-sheet growth, particularly where banks are reluctant or unable to raise new equity.

Industry estimates suggest higher taxation could reduce lending capacity, although such estimates depend heavily on assumptions about banks' responses.

On 16 October, the IMF cautioned against increasing bank taxes, suggesting that the UK examine alternative revenue measures and spending reforms.

What are the lessons for Australia?

Australia already has its own major-bank levy, introduced in 2017.

It applies at an annualised rate of 0.06% to specified liabilities of large authorised deposit-taking institutions, alongside Australia's 30% company-tax rate.

The UK proposal would therefore not introduce an entirely unfamiliar approach.