British banks sheltered about £4bn of profits from tax last year through so-called deferred tax assets, according to Jonathan Pierce, an analyst at the investment bank Jefferies, who has proposed that lenders offer the chancellor a five-year freeze on the relief to head off a steeper tax rise in his budget on 28 October.
Pierce said the industry should “sit down” with John Healey and agree a deal. Writing in a note to clients, he said the “potential result” would be “extra tax receipts, happy backbenchers, happy banks, and impressed markets”.
Deferred tax assets, or DTAs, are past losses offset against future profits, lowering a lender’s tax bill. Pierce estimated that the shield cost the Treasury about £1bn last year.
What the proposal would do
Under his suggestion, lenders would agree not to use the shield for a five-year period. In return, the Treasury would guarantee the DTAs in the event of insolvency, enabling banks “to remove the current DTA deduction from regulatory capital”. Banks would pay a 2 per cent fee for the guarantee, he added.
Lloyds Banking Group alone protected about £1.5bn of profit from tax last year thanks to losses dating back to the 2008 financial crisis, Pierce estimated, and will continue to benefit from DTAs for ten years.
Under his proposed arrangement, the tax collected from Lloyds could increase by about £500m a year, he said. That would shave 1 per cent off the bank’s annual pre-tax profits, while its core regulatory capital would immediately increase by about £4bn.
Such a scheme “may also avoid the need for a change in surcharge”, Pierce said, or cap any increase in that tax at 2 percentage points, taking it to 5 per cent.
Pressure for a bank tax rise
The proposal comes amid mounting speculation in the City, and warnings from parts of the financial services industry, that Healey is preparing to raise taxes on lenders in his first budget.
Both the Trades Union Congress and Positive Money, a campaign group, have claimed that the banking industry is enjoying “windfall” profits from higher-for-longer interest rates, and that taxes on lenders should go up to fund measures to help households with cost of living pressures.
Banks argue that they already shoulder a heavy burden compared with other sectors, because they pay a corporation tax surcharge on their profits and a levy on their balance sheets. According to UK Finance, an industry lobby group, that meant banks operating in Britain faced a total tax rate of 46.6 per cent last year, compared with 39.1 per cent in Frankfurt and 27.9 per cent in New York.
There is speculation that Healey might decide to lift the surcharge from its present level of 3 per cent to as much as 8 per cent, which was the rate until April 2023, when it was lowered to partially offset an increase in corporation tax.
Business groups have separately pressed the chancellor over the cost of doing business before the budget. The CBI has said that tax and energy costs are holding back investment, while Healey told Bloomberg TV in July that he was as concerned about the cost of business as the cost of living.
The Treasury said: “Decisions on tax are a matter for the chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals.”
Amy Ingham
Amy Ingham is a reporter at Business Matters, covering UK business news with a focus on breaking news, business policy, late payments and insolvency. She joined the magazine in 2026 after completing the NCTJ Diploma in Journalism at Harlow College's journalism school. Her recent reporting includes British Steel's nationalisation and its impact on SME suppliers, the decline in late payments by large firms, and Insolvency Service director disqualifications. Reach her at aingham@cbmeg.co.uk.
