UK Banks Are Paying More Tax Than Ever — And They're Not Happy About It

UK banks are footing a bigger tax bill than at any point since before the 2008 financial crisis and the industry wants something done about it.

New research from AFME and KPMG is piling pressure on Chancellor Rachel Reeves to actively cut bank taxes, not just hold the line. The argument? The UK’s tax regime is making British lenders less competitive globally — and ultimately, customers foot the bill.

Here’s what’s going on.

The Numbers Don’t Lie

In the 2024–25 financial year, UK banks contributed around £35.2bn in total tax — up sharply from £23.3bn before the financial crisis. The sector’s total effective tax rate now sits at 46.4%, nudging up from 45.8% the year prior, partly thanks to Reeves’ hike to employer National Insurance contributions.

That’s not a typo. Nearly half of every pound banks earn goes to the Treasury.

Why Banks Get Taxed Differently

On top of the standard tax regime that applies to all businesses — corporation tax, VAT, property taxes, NI — banks face two additional levies:

The bank levy: A tax on a bank’s debts and liabilities, designed to discourage risky short-term borrowing. Higher rate for short-term debt, lower for long-term.
The surcharge: An extra 3% on top of the 25% corporation tax rate, applied to bank profits.

The result? UK lenders are competing internationally while carrying a heavier tax load than most of their rivals.

What the Industry Wants

AFME isn’t just venting — it’s lobbying with a specific wish list:

A government commitment to freeze bank taxes for the rest of this parliament
A gradual phase-out of the bank levy to bring banks in line with the wider economy
Simplified compliance and reporting requirements

The group’s core argument is that sector-specific taxes don’t just hit shareholders — the costs “are ultimately transferred to bank services and customers, resulting in increased costs across the broader economy.”

In other words, when banks pay more, so do you.

The Political Tightrope Reeves Is Walking

Reeves had a choice at last autumn’s Budget: squeeze banks or play nice. She played nice — and within 48 hours, several major British banks announced sizeable UK investment commitments. Coincidence? Probably not entirely.

City minister Lucy Rigby also signalled a warmer tone, saying banks deserved to come off the “naughty step” as the government looks to loosen post-financial crisis regulation.

But the political picture is anything but stable. Analysts at Moody’s have flagged leadership uncertainty around Keir Starmer as a key risk for the sector — warning that a shift to a more left-wing leader could be “uncomfortable” for UK banking.

And then there’s Nigel Farage, who made his position clear at Davos: Reform UK would end what he called banks’ access to “free money” from quantitative easing earnings. He framed it not as a new tax, but as closing a subsidy. Banks would beg to differ.

The Bottom Line

UK banks are at a crossroads. They’re paying record levels of tax, facing political headwinds from multiple directions, and competing against international peers who don’t carry the same burden. The AFME report is essentially a warning shot: ease the pressure now, or risk longer-term damage to the UK’s financial competitiveness.

Whether Reeves listens — or whether political expediency wins out — remains to be seen. Watch this space.

FAQ

Q1: Why do UK banks pay more tax than other businesses?

A: On top of standard business taxes, banks face a sector-specific levy on their liabilities and a surcharge on profits. These were introduced after the 2008 financial crisis to reduce systemic risk and make the sector contribute more to public finances.

Q2: What is the bank levy, and how does it work?

A: The bank levy is a tax on a bank’s debts and liabilities, designed to discourage reliance on risky short-term borrowing. Short-term debt attracts a higher rate than long-term debt, which is seen as more financially stable.

Q3: Did Rachel Reeves raise taxes on banks in the Autumn Budget?

A: No — Reeves held back from targeting banks directly, despite significant pressure from think tanks and politicians. However, her employer NI increase did push the sector’s total tax rate higher.

Q4: What did AFME recommend to the government?

A: AFME called for a freeze on new bank taxes, a phased removal of the bank levy, and simpler tax compliance rules — arguing that high bank taxes ultimately get passed on to customers.

Q5: What’s Nigel Farage’s position on bank taxation?

A: Farage supports ending banks’ access to earnings from quantitative easing, framing it as removing a subsidy rather than imposing a new tax. He made the case at the World Economic Forum in Davos earlier this year.

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Effective Date: 15th July 2025

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