UK Banks Rally as Treasury Dumps Contested Tax Plan

The UK Treasury appears to have avoided a contentious bank tax in the upcoming budget, sparking relief among financial institutions and investors. UK bank shares surged on Tuesday, with NatWest, Barclays, and Lloyds all posting significant gains. The banks had lobbied aggressively against the proposed levy, warning that it could stifle lending and harm the broader economy. The Financial Times reported that the effort has seemingly paid off, with insiders indicating the tax will not be included in Rachel Reeves' budget.

Campaigners and opposition figures, however, have not given up. Over 68,000 people signed a petition urging the chancellor to impose a windfall tax on the profits of major banks, which have recorded record earnings in recent years. The argument centers on the idea that banks are benefiting from higher interest rates and risk-free reserves held at the Bank of England. Critics say this gives them an unfair advantage, especially during a cost-of-living crisis.

The Treasury's decision to exclude the bank tax aligns with broader efforts to manage economic stability in the run-up to the budget. The government has reportedly asked banks to publicly support the upcoming announcement, emphasizing policies that will boost lending to small businesses and first-time homebuyers. This approach aims to balance fiscal responsibility with growth-focused messaging, even as concerns over public spending persist.

How Markets Reacted

The UK's financial markets responded positively to the news, with the FTSE 100 index rising in early trading.

Bank shares led the charge, with NatWest up 3.3%, Barclays at 2.9%, and Lloyds Banking Group at 2.95%. Investors appeared relieved that the tax debate, at least for now, was resolved in favor of the banking sector. The broader market also benefited from optimism around the budget, with consumer staples and financials contributing to the upward trend in early trading.

The rally wasn't limited to banks. Kingfisher raised its full-year profit forecasts, citing progress in strategic initiatives and cost discipline. This move pushed its shares up by over 5%. The company operates B&Q and Screwfix in the UK and several international markets, and its performance suggests that parts of the retail sector are holding up despite economic headwinds.

What This Means for Investors

Investors are now watching closely for signals on how the budget will balance taxation, public spending, and economic growth. The absence of a bank tax has allowed the sector to breathe easier, but market observers note that pressure on the Treasury to fund public services remains intense according to analysis. The government is expected to introduce other measures, including a potential mansion tax on properties valued above £2 million, which could generate around £400 million by 2029–2030. This tax, while modest in scale, marks a shift toward targeting wealth rather than income, signaling a long-term recalibration of fiscal policy.

The focus on wealth taxation is also evident in other proposals, such as a revaluation of council tax bands and a potential profits tax on gambling companies according to reports. These measures could affect high-net-worth individuals and certain industries, but the broader economic implications remain uncertain. The Treasury will need to balance these revenue-raising initiatives with the risk of dampening investment or triggering market distortions, particularly in the luxury property sector.

Risks to the Outlook

While the budget announcement brings clarity on several fronts, uncertainties remain. The proposed mansion tax, for instance, could lead to "price bunching" as property owners seek to avoid the surcharge by selling or revaluing assets just below the threshold according to analysis. This behavior could reduce the effectiveness of the tax and create market volatility. Additionally, the reliance on revaluated council tax bands-based on 2026 data-introduces a layer of complexity that could delay implementation or reduce its intended impact.

For the financial sector, the absence of a bank tax is a short-term win, but the long-term outlook depends on how the government addresses other revenue needs. The Treasury's request for banks to publicly endorse the budget's lending-focused policies suggests an ongoing partnership between regulators and financial institutions. However, if public pressure for a windfall tax grows, the government may revisit the idea in future budgets.