Kemi Badenoch, leader of the Conservative Party, has raised concerns that proposed increases in bank taxes set to be announced in the upcoming Budget could hinder economic growth and weaken the competitiveness of the United Kingdom’s financial services sector on the global stage. Badenoch is expected to address these issues during a visit to Edinburgh’s finance community, as investors prepare for potential tax hikes under Chancellor John Healey’s planned measures on October 28.

Andrew Griffith, Badenoch’s shadow chancellor, emphasized the importance of supporting business and wealth creation, warning that additional taxes on financial services would hinder Britain’s growth prospects. Healey, however, has previously described the financial services industry as central to driving greater investment and economic expansion across the country. The Treasury has declined to comment on speculation surrounding tax changes.

At a House of Commons Treasury Committee hearing, Lord Jim O’Neill, former Goldman Sachs chief economist and occasional adviser to Greater Manchester Mayor Andy Burnham, indicated that Chancellor Healey might default to raising bank taxes to generate revenue in the Budget. While cautioning against broad tax hikes such as on capital gains, O’Neill suggested that a modest increase in bank taxes could be a likely outcome, though he expressed reservations about this approach.

Market participants broadly anticipate an increase in the bank surcharge, currently set at 3 percent on profits in addition to the 25 percent corporation tax. One investor noted that a rise in the surcharge by up to three percentage points could prompt a rally in bank shares. UK banks, whether domestic or foreign-operated, also face an annual levy on their balance sheets.

The recent environment of rising interest rates has bolstered profits for many banks, supporting their share valuations. Nevertheless, investment managers caution that a higher bank levy risks undermining the UK’s appeal compared to other financial hubs. Richard Marwood, head of UK equities at Royal London Asset Management, warned that increased levies could significantly damage investor sentiment. Niall Gallagher, European equities investment manager at Jupiter, described the UK’s history of imposing windfall taxes on unpopular industries as a factor that raises the cost of capital and hampers competitiveness and capital raising for companies.

Jarid Klug, senior equity portfolio manager at DWS, noted that the current political rhetoric contributes to uncertainty that may reduce the attractiveness of UK banks relative to their international peers. He added that banks might pass on the cost of tax increases to customers.

Among investors, there is debate regarding whether any additional tax burden would apply solely to British banks or extend to foreign operators as well. Georgina Hamilton, fund manager at Polar Capital, criticized the idea of targeting only domestic banks to appease large foreign firms such as JPMorgan as “absurd.” She suggested that the Treasury might instead consider options like restricting banks’ ability to use past losses to offset tax liabilities as a less harmful means of raising revenue.