𝓤𝓷𝓲𝓽𝓮𝓭 𝓝𝓮𝔀𝓼

UK bank shares have dropped after an influential think tank said Rachel Reeves could raise billions of pounds for the public purse by imposing a windfall tax on lenders.

City traders were reacting to a report from the Institute for Public Policy Research (IPPR) which raised fears that banks could be targeted at the Chancellor’s upcoming autumn budget.

NatWest and Lloyds share prices were tumbling by more than 4%, and Barclays was dropping by more than 3% on Friday morning, leading the biggest fallers on the UK’s FTSE 100.

HSBC and Standard Chartered shares were down by about 1.5%.

The IPPR said Ms Reeves should tax bank windfalls to recover taxpayer money spent on compensating losses from the Bank of England’s cash-printing drive.

Hiking a levy on the profits of British banking giants could raise up to £8 billion a year for public services, the IPPR said.

The think tank argued the UK is an international outlier in having its Treasury pay for central Bank losses on its bond-buying quantitative easing (QE) programme.

Russ Mould, investment director for AJ Bell, said: “It’s hardly a surprise that every cushion is being upended in the hunt for extra cash to fill the much-discussed black hole in the Treasury’s finances.

“The issue is whether taxing the banks more will end up stifling the very growth the Government is keen to foster, by crimping lending to businesses and households alike.

“The banks will undoubtedly argue as such, and shareholders may not want to see any such raid either.

“The wider public may see it differently, given how HSBC, Barclays, NatWest and Lloyds are expected to earn some £44 billion between them worldwide in 2025, their third-best year ever, after 2023 and 2024.”

After a period of making profits on the QE programme, the Bank of England is facing record losses, estimated to cost the taxpayer £22 billion a year, as interest rates have risen since 2021, the IPPR warned.

This money is then partly being funnelled to bank shareholders due to a “flawed” policy design, boosting profits while millions across Britain continue to face cost-of-living pressures, the report said.

It recommended the Treasury introduce a “QE reserves income levy”, similar to the 2.5% deposit tax imposed on banks under Margaret Thatcher in 1981, to rebalance the existing set-up.

The bosses of Britain’s biggest banks recently spoke out to caution the Chancellor against hiking taxes for banks in her autumn budget.

Lloyds chief executive Charlie Nunn said efforts to boost the economy and foster a strong financial services sector “wouldn’t be consistent with tax rises”.

Barclays chief executive CS Venkatakrishnan echoed Mr Nunn’s remarks by saying banks were already “among the biggest tax payers in the country” and were an important sector to help drive the Government’s pro-growth aims.

The leading think tank IPPR, which worked closely with the Government on its industrial strategy, also called on the Bank of England to slow down its sale of bonds – so-called quantitative tightening (QT) – to save more than £12 billion a year.

These two policies together could save more than £100 billion over this Parliament, opening up much needed fiscal headroom for the Chancellor, it said.

Under the proposals, the receipts from the banks levy would be used to support “households and growth” and would fall to zero once all QE-related gilts are off the Bank of England’s balance sheet, or when the bank rate reaches 2%, meaning the tax would be temporary.

Given the “targeted” nature of the tax, it should only have a “small impact, if any” on UK banks’ competitiveness and smaller banks should be exempted from the measure, the think tank said.

The warning came amid warnings from economists that tax rises in the autumn budget are likely needed to plug a hole in the public finances, prompting speculation about which areas the Chancellor might target.

A Treasury spokesperson said: “As set out in the plan for change, the best way to strengthen public finances is by growing the economy – which is our focus.

“Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8 billion and cut borrowing by £3.4 billion.

“The Monetary Policy Committee (MPC) has operational independence to set monetary policy, including how it approaches asset sales, which is essential for the effective delivery of monetary policy.”

Carsten Jung, the IPPR’s associate director for economic policy and a former Bank of England economist, said the central bank and Treasury had “bungled” the implementation of QE.

“What started as a programme to boost the economy is now a massive drain on taxpayer money,” he said.

“While families struggle with rising costs, the Government is effectively writing multibillion-pound cheques to bank shareholders.”

The Bank of England’s Governor, Andrew Bailey, has previously stressed that the “interest paid on reserves is not free money for the banks, not least as most of it is paid on to customers in the form of interest on their deposits”.

He said, in a letter to Reform UK MP Richard Tice in June, that a cut to the income that banks receive was likely to result in lower savings rates or higher borrowing costs for consumers.

A spokesman for the Bank said: “Tax and spending decisions are for the Government, not the Bank.

“We remain 100% focused on making sure that inflation returns all the way to the 2% target, because low and stable inflation is the foundation of a healthy economy.”