Is a major financial shake-up on the horizon for the UK? City traders are on edge as reports suggest a significant new tax could hit major banks in the upcoming Autumn Budget, potentially raising billions. But what does this mean for the economy and your finances? The latest report has sent shockwaves through the markets.

UK bank shares have experienced a significant downturn as City traders react to a new, influential report advocating for a potential windfall tax on major lenders, sending ripples across financial markets.

The Institute for Public Policy Research (IPPR), a leading think tank, has proposed that Shadow Chancellor Rachel Reeves could generate billions for the public purse by implementing a levy on the profits of British banking giants.

This recommendation stems from the IPPR’s analysis of the Bank of England’s quantitative easing (QE) programme, arguing that the UK’s Treasury is uniquely shouldering the burden of central bank losses, a cost now estimated at £22 billion annually due to rising interest rates.

The think tank asserts that a “QE reserves income levy,” reminiscent of a 1981 deposit tax, could recover up to £8 billion annually, rebalancing what it describes as a “flawed” policy design that has inadvertently boosted bank profits while millions face cost-of-living pressures.

However, leading banking executives have voiced strong opposition, cautioning against such measures. Figures like Lloyds chief executive Charlie Nunn and Barclays chief executive CS Venkatakrishnan argue that increasing taxes on banks would contradict the government’s objectives of fostering economic growth and a robust financial services sector.

The debate highlights a critical dilemma for the government: how to address the growing hole in public finances, estimated at £22 billion a year, while simultaneously encouraging economic expansion without stifling the banking sector, a key driver of the economy.

Bank of England Governor Andrew Bailey has previously countered arguments for taxing banks, explaining that interest paid on reserves largely translates into interest for customers on their deposits. He warned that cutting this income could lead to lower savings rates or higher borrowing costs for consumers, creating a complex economic trade-off.

Despite these warnings, the IPPR maintains that its proposed levy would be “targeted” and temporary, designed to fall to zero once QE-related gilts are off the Bank of England’s balance sheet or when the bank rate reaches 2%, with smaller banks exempted to ensure minimal impact on competitiveness.

As the Chancellor prepares for the autumn budget, the banking industry remains in a state of apprehension, with the prospect of new taxation adding significant uncertainty to the UK banking landscape and broader financial stability.