Chancellor John Healey is planning to increase taxes on the UK's banking sector, senior banking executives have informed the BBC. The move is expected to be announced in the upcoming Budget, scheduled in two weeks.

Banks are considered a critical component of the UK economy, with the Chancellor having previously described them as "crown jewels." However, leaders within the sector have expressed concerns that this proposed tax increase could negatively impact their operations and the broader financial landscape.

In the first six months of the current year, the UK's four largest banks collectively reported profits of approximately £15 billion. Trade unions have advocated for additional taxation on these profits, arguing for a "fairer share" from the sector. UK Finance, the trade body representing the banking sector, has cautioned that further tax hikes could diminish the UK's competitive edge, deter investment and job creation, and contradict the government's growth objectives.

The UK's major banks and building societies currently face a 3% surcharge on their profits, in addition to the standard 25% corporation tax rate. They also contribute to a levy based on the total assets held on their balance sheets. Last year, the banking sector contributed nearly £40 billion to the Treasury, including income tax paid by its employees. The bank levy generated £1.4 billion, and the surcharge an additional £1.2 billion.

There are several avenues Healey could explore to generate more revenue from the sector. One possibility is raising the 3% surcharge back to its previous level of 8%, a change made under Rishi Sunak when corporation tax was increased. Restoring the surcharge could potentially yield around £2 billion annually. The bank levy, which taxes banks based on the size of their balance sheets rather than profits, could also be adjusted. Currently, it charges 0.1% on short-term loans and 0.05% on longer-dated loans, with mortgages excluded.

Historically, banks have argued that higher taxes could make the UK less competitive internationally and reduce their capacity to lend, thereby hindering economic growth. However, Sir Philip Augar, a former banker and author, suggested to the BBC's Today programme that there is scope for a moderate tax increase, potentially raising up to £3 billion per year. He noted that banks are currently experiencing "booming conditions," largely due to rising interest rates, which have widened the profit margins between lending rates and savings rates.

Sir Philip further commented that while the banking sector often expects taxpayer support during difficult times, it seeks preferential treatment during periods of prosperity. He articulated this by stating that banks "cannot simultaneously be too big to fail and too big to tax." Paul Nowak, general secretary of the Trades Union Congress, echoed the sentiment that banks should contribute a "fairer share," while emphasizing that the majority of bank employees are not high earners and that the aim is a successful financial services industry.

This potential tax increase on banks comes amidst broader discussions about the UK's fiscal policy as the government seeks to balance its budget and fund public services. The specifics of any changes to bank taxation will be closely scrutinised by both the financial industry and economic policymakers.