Chancellor John Healey is preparing to increase taxes on banks as part of efforts to address a significant shortfall in government finances driven by rising borrowing costs. The potential measures, expected to be announced in the upcoming budget, aim to raise around £2 billion annually, contributing to the funding of support for low-income households and businesses facing energy price pressures this winter.

One key proposal under consideration is reversing a recent reduction in the bank profits surcharge, a levy applied on top of corporation tax. Originally set at 8 percent in 2016, the surcharge was lowered to 3 percent earlier this year. Raising it back to 8 percent could generate substantial additional revenue for the Treasury. Healey is also reportedly examining the possibility of implementing a one-off windfall tax on banks.

The tax changes seek to partially close an estimated £12 billion gap in public finances, exacerbated by the conflict in the Middle East and associated economic challenges. Economists suggest that the government’s fiscal headroom—its capacity to manage tax and spending plans without broader economic disruption—has shrunk from £24 billion to roughly £15 billion. While vulnerable to financial constraints, Healey has emphasized his commitment to maintaining downward trajectories for public debt through to 2029-30 and protecting the overall resilience of the British economy.

Healey, speaking at the International Monetary Fund meeting in Bangkok, described banks as the “jewel in the British economic crown” but acknowledged the difficult fiscal decisions required. The government plans to avoid additional funding for key departments such as health, education, and the police, urging that these sectors manage within existing budgets to keep spending aligned with fiscal rules.

Despite recent praise from the IMF for the United Kingdom’s deficit reduction progress and its position as the G7 country projected to achieve the sharpest fall in its budget deficit over the next five years, the proposed tax rise has met resistance from the banking sector. Industry groups including UK Finance and TheCityUK have cautioned that higher taxes might undermine investor confidence and could prompt international banks operating in the UK to shift investments abroad. David Postings, head of UK Finance, expressed concerns that such measures risk reducing the investment necessary to drive economic growth.

To mitigate the impact on foreign lenders, some City stakeholders have suggested the government consider measures targeting deferred tax assets—accounting mechanisms allowing banks to offset past losses against current profits. Such a moratorium would primarily affect domestic banks still carrying tax assets from the financial crisis of 2007-09, while largely sparing international institutions.

Latest economic data shows the UK economy grew by 0.7 percent in the past quarter, exceeding forecasts and reinforcing the country’s relatively strong growth performance among major economies this year. Nevertheless, Healey’s balancing act involves securing additional government revenue without destabilizing the banking sector or broader market confidence, amid persistent challenges posed by inflation, geopolitical tensions, and energy costs.