Banking and gambling stocks climbed after John Healey’s Budget tax measures proved less severe than investors had feared.
In his first fiscal statement, the Chancellor announced that the bank surcharge would double from 3 per cent to 6 per cent, with the additional revenue helping to fund household energy support.
The increased charge on bank profits, which is paid alongside the 25 per cent corporation tax rate, will apply for 15 months from January.
There had been concern that a heavier tax burden would force banks to increase borrowing costs for households and companies, potentially weighing on economic growth.
However, the rise fell short of the 8 per cent rate that had been discussed in the run-up to the Budget, despite Mr Healey previously describing the banking industry as a ‘jewel’ in the British economy.
It was also substantially below the 16 per cent surcharge sought by the TUC, which has argued that a 35 per cent levy on bank profits could generate £15billion annually.
Lloyds shares surged after the Budget’s bank tax plans proved less damaging than expected
Bank shares had come under pressure in recent weeks as investors assessed the potential scale of Labour’s proposed tax raid. They rallied sharply during the Chancellor’s speech before giving up some of those gains.
Lloyds and NatWest advanced by about 2 per cent, while Barclays rose 1.6 per cent and Standard Chartered added 2.4 per cent.
Neil Wilson, an investor strategist at Saxo, said banking stocks had ‘rallied sharply’ because the Budget was ‘better than the market’s worst fears for a bank tax raid’.
Gambling companies also enjoyed a boost after the Chancellor increased the tax on slot machines from 20 per cent to 25 per cent.
The industry warned that the higher machine games duty would still result in job cuts and the closure of venues, although speculation had suggested the rate could climb as high as 40 per cent.
Rank, which owns Mecca Bingo and Grosvenor Casinos, jumped by almost 12 per cent. Entain, the owner of Ladbrokes and Coral, gained close to 4 per cent.
Despite the market’s initial relief, an industry source described the measure as ‘a punitive tax raid and a jobs killer. It’s ideology on steroids pushed by donors, campaigners and Gordon Brown.
‘The PM used to back bookies, but now his Government is putting up gambling taxes yet again in the knowledge it will force hundreds of them to close.
‘You can’t give people breathing space when they don’t have a job.’
A customer uses the slot machines at Mecca Bingo
Before the Budget, TUC general secretary Paul Nowak said the banking sector’s strong profits made it ‘blatantly obvious banks can afford to contribute more’.
Shadow Chancellor Andrew Griffith, however, warned that increased taxation would raise ‘the cost of credit for businesses and mortgage-holders’ and make the City ‘less competitive than its international rivals’.
UK Finance said another tax increase risked making Britain an even greater international outlier. It noted that UK banks currently face an effective tax rate of 46.5 per cent once employment levies and VAT are included, compared with 39.1 per cent in Frankfurt and 27.9 per cent in New York.
Peter Johnson, financial services tax policy leader at Deloitte, said: ‘Although recent profits have placed banks firmly in the spotlight, higher taxes can have repercussions well beyond the sector if they restrict the availability of credit, raise funding costs for households and businesses, or undermine growth.
‘The confirmation that the measure is temporary and limited to 15 months will therefore be met with quiet relief by banks, which are already taxed more heavily than many other types of business. International investors will nevertheless be watching closely to assess what it means for the UK as an investment destination.
‘Providing clarity on the tax system after the temporary measure expires will be important for banks and the broader financial services industry. A consistent and predictable policy should help protect the UK’s competitiveness and attract overseas investment.’
Mark Eastwood, director of corporate sales at property lender Together, said: ‘Having called the banking sector the jewel in the crown of the country’s economy, the Chancellor’s decision to increase the bank profit surcharge undoubtedly takes away some of its shine.
‘The Treasury will have regarded the move as necessary because of limited fiscal headroom and a desire to avoid widespread personal tax increases. But given the sector’s importance to the economy, the consequences are likely to filter through to households across Britain.
‘Banks may respond by accelerating staff reductions or moving some operations overseas. They could also seek to recover the cost of the tax by offering lower savings rates and charging more on mortgages.
‘Mortgage borrowers are already facing a volatile market, unpredictable swap rates and rising inflation. Any further upward pressure could prompt first-time buyers to delay their plans and force existing homeowners to reduce other spending to manage higher repayments.’
The bank surcharge is added to the standard corporation tax rate, meaning banks already face a higher overall tax burden than most other businesses.
The additional levy was reduced by the Conservatives from 8 per cent to 3 per cent in 2023, when the main corporation tax rate was increased from 19 per cent to 25 per cent.
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