Bankers groan at UK tax rise even as lenders rally after Budget

[LONDON] While some bank stocks rallied to their highest levels in 17 years, financiers were stewing over how they’ll be personally affected by Chancellor of the Exchequer Rachel Reeves’ moves to shore up the UK’s finances. 

A variety of measures will impact City of London workers more than most, including a move to cap tax-efficient pension contributions and a plan to impose a levy on homes valued at more than £2 million (S$3.4 million). New tax rates for dividends, property and savings income and a decision to tinker with the treatment of cash savings accounts added to the gloom.

“The Budget has again disincentivised anyone from being short term or long term in the UK,” Jason Kennedy, whose eponymous search firm helps banks and hedge funds recruit traders across the City. “Those who can are leaving. Those stuck with kids are biding their time and those setting up businesses are considering other options.”

Even as their staffers complained, shares of the UK’s biggest banks led the FTSE 100 index higher after Reeves’ announcement finally put to rest their fears that she would revive a windfall tax on bank earnings. Those concerns had re-emerged across the City in recent weeks after Reeves shelved plans to raise income taxes, creating a gap in her fundraising target.

Shares of Lloyds Banking Group and NatWest Group briefly touched their highest levels since 2008 before paring those gains on Wednesday (Nov 26), while Barclays’s stock rallied as much as 4 per cent. 

“This mainly comes on the back of no mention of them in the Budget, which having been warned that there could be a levy placed on the sector, is good news,” said Michael Field, chief equity strategist at Morningstar. 

Reeves’ decision to leave banks largely untouched comes after years of work by the ruling Labour Party to cultivate support among executives. Bank bosses, whose company profits have jumped in the era of higher interest rates, have vehemently argued for months that imposing a fresh tax on the industry would run counter to her commitment to ensuring the UK’s financial sector remains competitive on the international stage.

“Today was a huge missed opportunity to bring in billions with a windfall tax on bank profits,” said Sara Hall, co-executive director at the campaigning group Positive Money. “And we’re disappointed the chancellor opted to listen to lobbyists over the electorate on this issue, who were overwhelmingly in favour of the policy.”

Reeves’ decision to freeze income tax thresholds also elicited groans across the City. The move is expected to result in 10 million additional workers paying the higher 40 per cent rate of income tax, according to the labour union Unite. By 2030, one in four workers will be paying the higher rate, up from 10 per cent five years ago, according to the union, which counts staffers at Lloyds as some of its 1.2 million members.

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Sacrificing pretax earnings into a pension – a tactic used by some workers to keep their pay below higher income tax thresholds – will also be subject to a cap from 2029.

“The trouble is, many of those who will be affected by these changes just don’t feel well off any more,” said Antonia Medlicott, founder and managing director at Investing Insiders. “The people being asked to shoulder the greatest burden might not feel like they have broad enough shoulders to manage it.” 

Reeves’ so-called mansion tax will introduce a surcharge for the most expensive homes, starting at £2,500 a year and rising to as much as £7,500 beginning in 2028. But house prices in London mean even modestly sized family homes in certain neighbourhoods will be caught by the levy. 

“The higher earners in the banking sector will be affected the same way as in other sectors,” said Mark McKay, a managing director with Alvarez & Marsal. “Particularly people with houses over £2 million, that will be an unwelcome piece of news.”

Still, the impact on lenders themselves should be minimal: less than 1 per cent of mortgage transactions relate to properties worth more than £1.5 million, Barclays analysts Aman Rakkar and Grace Dargan pointed out in a note. 

Reeves also set out plans to increase the rate of tax applied to rental income by two percentage points. It is the latest in a series of tax hikes on residential landlords who have responded by selling homes, reducing the supply of rental properties and forcing rents higher. 

“With so much of the UK’s wealth tied up in property, this is a timely reminder that the mantra ‘my property is my pension’ is fraught with risk,” Maike Currie, vice-president of personal finance at PensionBee, said in a statement. 

The same tax hike will also apply to earnings from savings held outside Individual Savings Account (ISAs) and dividends, taking the shine off Reeves’ proposal to scrap stamp duty tax for investors buying shares in newly listed companies. 

That’s on top of tighter limits on savings that can be stashed in tax-free cash ISA accounts, part of the government’s push to get more households investing in stocks and shares. Britons have more than £100 billion in these accounts, roughly two thirds of which is in cash, official figures show.

Shares in investment firms such as St James’s Place and IG Group Holdings also jumped on Wednesday, partly on hopes that the surprise changes to savings rules would stir demand from Britons concerned about their money.

Robin Fieth, chief executive of the Building Societies Association, said the ISA changes “add more complexity, particularly around ISA transfers, and risks damaging the overall ISA brand”. BLOOMBERG