Budget 2026 series

Budget 2026 29 October 2026

Markets · Banks

UK Banks Face a £1.5 Billion Budget Tax Increase — But Could Investors Have Feared Worse?

Lloyds, NatWest and Barclays will face higher taxation from January 2027. The measure is negative for profits, but its temporary nature makes a considerable difference to the investment case — if it really is temporary.

Mickey Perry29 October 2026Equity & Markets Insight

What has been announced?

In a generally unremarkable autumn Budget, the banking sector was one of the prime areas of note. The Chancellor, John Healey, announced that the Bank Corporation Tax Surcharge will increase from 3% to 6% for 15 months, beginning on 1 January 2027 and ending on 31 March 2028.

The Treasury anticipates this will raise approximately £1.5 billion.

In many ways, it seems to me that investors were encouraged by the government’s wording of this. There may have been concern that this Labour government would tax the big banks more dramatically, and the temporary nature of the measure is at least technically positive for the banking sector.

I have some slight reservations. I do not think it is out of the question for this government to extend these so-called temporary surcharge measures once the 15 months are completed. As such, I have some expectation that in the longer term UK banks will be paying this higher surcharge well beyond March 2028, and possibly at higher percentages than they are looking at right now.

This increase to 6% I can see, with time, continuing to increase.

What will the banks pay?

The UK currently imposes a headline Corporation Tax rate of 25%, with an additional surcharge on qualifying banking profits. The new announcement increases the combined headline marginal rate from 28% to 31%, ignoring the effects of allowances, other taxes and differences in individual banks’ taxable profits.

This level is significant enough to require changes to earnings forecasts, but not necessarily large enough to undermine the fundamental profitability of the sector. In a general sense I have been seeing banks as undervalued, so there is room for these adjustments.

What were the banks paying previously?

HM Revenue and Customs statistics show that the UK banking sector contributed £39.1 billion in tax receipts during 2025–26, an increase of 8.5% from approximately £36 billion the year before. That total includes taxes associated with employment, rather than just taxes levied on banking profits.

What the banking sector paid in 2025–26

Receipts from the UK banking sector by tax, £ billion, financial year 2025–26

Pay As You Earn income tax and National Insurance contributions on banking-sector employment made up £26.8 billion of the total. Corporation Tax on the sector contributed £9.7 billion, the Bank Levy £1.4 billion and the surcharge itself £1.2 billion, up by roughly a fifth on the approximately £1 billion it generated in 2024–25.

Who is most vulnerable?

Lloyds Banking Group and NatWest Group have substantial domestic banking operations, and therefore are likely to see a greater proportion of their profitability exposed to this change.

Barclays will also be affected, but it has a significant international corporate and investment banking operation, which will provide some degree of relief.

HSBC and Standard Chartered have much larger international earnings streams, so the additional UK surcharge should represent a smaller proportion of their total group earnings, although this clearly depends on their taxable UK profits.

Furthermore, the specialist lenders, including OSB Group and Paragon Banking Group, may see more consequential tax implications than a larger global bank, as they are highly specific to the UK market and a substantial proportion of their profits comes from qualifying UK banking activity.

What each bank actually paid in surcharge

Each bank discloses in the tax note of its annual report how much the 3% surcharge added to its tax charge. Doubling the rate to 6% on the same profits would add the same amount again, so the reported figure is the cleanest guide to what the extra 15 months will cost, assuming unchanged qualifying profits.

NatWest Group reported a £198 million surcharge charge in 2025 and Lloyds Banking Group £167 million. Doubling implies roughly £198 million and £167 million of additional annual tax respectively, or around £248 million and £209 million over the 15-month period. Set against attributable profit of £5,479 million and £4,196 million, the extra annual charge is equivalent to 3.6% of NatWest’s profit and 4.0% of Lloyds’.

HSBC’s United Kingdom banking surcharge was $179 million in 2025, which is 0.8% of its $21.1 billion attributable profit — the international earnings base doing exactly what I would expect. Standard Chartered’s 2025 tax reconciliation carries no surcharge line at all, and its United Kingdom current corporation tax for the year was nil.

Barclays no longer shows the surcharge separately: its reconciliation bundles it into “other items, including banking surcharge”, a net credit of £8 million in 2025, so a clean figure cannot be taken from the accounts. On its £9.1 billion of profit before tax, the exposure is clearly real, but it is not disclosed.

The specialist lenders are smaller than the headlines suggest, because the £100 million group allowance covers most of their profits. OSB Group paid £4.7 million of surcharge in 2025 and Paragon Banking Group £4.2 million in the year to September 2025, so doubling adds roughly £4.7 million and £4.2 million a year — 1.7% and 2.3% of attributable profit.

Extra annual surcharge as a share of profit

Reported 2025 surcharge charge (the extra tax a doubling would add each year), as % of profit attributable to ordinary shareholders

The extra-per-year column simply repeats each bank’s reported 3% charge, since the rate doubles; the 15-month column multiplies it by 1.25. Attributable profit is profit attributable to ordinary shareholders for the same year. These are historical sensitivities, not forecasts of 2027 cash tax, and they assume unchanged profits and tax adjustments throughout the period.

Implied additional tax over the 15 months

Reported 2025 surcharge charge × 1.25, £ million, banks reporting in sterling

How the increase is calculated

Additional annual tax equals 3% of qualifying surcharge profits after the applicable £100 million group allowance. For £1 billion of annual qualifying profits before that allowance, this gives £27 million a year and £33.75 million over 15 months, assuming unchanged profits. If £1 billion is already the amount after the allowance, the corresponding figures are £30 million and £37.5 million.

The surcharge itself rises by 100%. The combined headline marginal rate increases from 28% to 31%, a 10.7% increase in the tax charge on the same affected profits before allowances and other adjustments. This does not mean total group tax rises by 10.7%, particularly for international banks.

Why share prices didn’t go down

A tax increase is unambiguously negative for after-tax profits, all else being equal. That does not mean it must produce a negative share-price reaction, and on Budget day the banks were up: NatWest closed up 2.0%, Lloyds up 1.7%, Barclays up 1.6% and Standard Chartered up 2.4%, with HSBC flat and the banks sector up 1.1%.

One reason share prices have not gone down so far may be that it takes some time for everyone to recalibrate their expectations of what each of these companies is worth.

In a general sense, I have found a lot of financial companies, and the banks, to be undervalued in our current market. When we are seeing high levels of opportunity value, that may give an indication that the share price can absorb these slightly changed expectations on profitability.

Investors had also been discussing the possibility of a considerably larger increase in the surcharge ahead of the Budget. A limited, temporary rise can therefore be regarded as a better-than-feared outcome. A rally does not mean banks benefit financially from higher tax; it means the announcement was less damaging than the assumptions already embedded in valuations.

Of greater influence will probably be movements in exchange rates, foreign profits, concerns about impairment charges and the general state of the economy.

Something the government has managed to do within this Budget is provide a certain level of clarity and stability for the market. They did not throw any incautious actions out, and they do seem to have things generally under control. I think the market would very much appreciate that over the additional 3% surcharge.

What the UK financial sector really needs to see is stability, and interest rates that do not crimp the overall growth of the economy. Maybe we are seeing that here.

Slightly encouraged, but only slightly

I regard the increase as a manageable but real earnings headwind, particularly for the domestically focused lenders. The 15-month duration matters: a temporary reduction in earnings has a substantially smaller effect on a discounted valuation than a permanent reduction of the same annual amount.

I would adjust the projected earnings per share of the UK-exposed banks to reflect the additional surcharge, but I would not automatically reduce their long-term growth assumptions. For Lloyds and NatWest, the crucial question remains whether their valuations already compensate investors for the risks associated with the domestic economy, interest rates and credit losses.

The Budget changes the numbers, but it does not necessarily change the underlying investment thesis. On an overall basis, I was slightly encouraged as far as the UK banking sector is concerned. But only slightly.