The British government is exploring a potential compromise to resolve an ongoing standoff over proposed tax measures targeting the banking sector, ahead of Chancellor John Healey’s upcoming budget on October 28. The debate centers on how to tax banks’ elevated profits while balancing concerns about competitiveness and economic growth.

The conflict arises from calls for a windfall tax on banks benefiting from recent high interest rates and strong profit margins, contrasted with industry warnings that additional levies could stifle lending and deter investment in the UK. Banks already face bank-specific taxes introduced after the 2007-09 financial crisis, including a corporation tax surcharge and a separate balance sheet levy, which followed government bailouts totaling £137 billion.

One proposal gaining traction within financial circles aims to bridge this divide by focusing on deferred tax assets (DTAs). These assets, accumulated largely as a result of past losses sustained during the financial crisis, enable banks to reduce their taxable profits by offsetting them against those earlier losses. According to estimates by analyst Jonathan Pierce, Barclays, Lloyds, and NatWest collectively shielded roughly £4 billion in profits from tax last year using DTAs, resulting in over £1 billion less in government revenue.

Pierce’s concept involves banks agreeing to pause the use of DTAs for five years, corresponding with the forecast horizon of the Office for Budget Responsibility, the independent fiscal watchdog. In exchange, the Treasury would guarantee the value of these DTAs, effectively turning them into tax credits. This arrangement would increase immediate tax payments without impacting reported profits and could provide regulatory capital benefits by allowing banks to count the guaranteed tax credits toward their capital buffers.

Banking sources have expressed cautious optimism about the proposal, suggesting it may offer a solution that satisfies both government fiscal objectives and industry concerns. One senior banker described it as a way for both parties to “walk away feeling they’ve got what they’ve needed.”

However, skepticism remains. Some industry insiders question whether the proposed government guarantee would yield the anticipated capital advantages, and legal concerns have been raised about potential state aid implications. The Treasury declined to comment directly on the idea, stating tax decisions are made by the chancellor in formal fiscal events.

At a recent meeting with the chief executives of major British banks—including Barclays, HSBC, Lloyds, and NatWest—Healey emphasized the challenging fiscal environment but stopped short of committing to any tax increases. Bank leaders reportedly warned that a windfall tax could negatively affect investor sentiment, particularly among international shareholders.

Concerns about competitiveness have been voiced by foreign banking executives, notably Jamie Dimon, CEO of JP Morgan Chase, which employs 23,000 people in the UK. Dimon has previously cautioned that increased taxes might force the bank to reconsider planned investments in London and reiterated opposition to measures perceived as lacking principle, especially if they disproportionately target domestic lenders.

Lobby groups representing the banking sector argue that the industry already makes a substantial contribution—estimated at £43 billion in taxes in the year to March 2025—and warn that heavier tax burdens could hamper growth and reduce the UK’s attractiveness compared to financial centers like Frankfurt and New York.

Conversely, trade unions and advocacy groups contend that banks’ elevated profits justify a windfall tax and that revenues could support programs to relieve household cost-of-living pressures.

The government’s decision on how to navigate this complex issue is expected to become clearer with the chancellor’s budget statement later this month.