British banks spent last year lobbying against higher levies, with Barclays chief CS Venkatakrishnan warning against a tax “squeeze”. Their effort held, but the Iran‑related war in the Middle East has pushed UK borrowing costs higher and strained public finances. Ministers, facing a widening fiscal gap, are now eyeing any extra revenue source, including banking taxes.

Analysts at Keefe, Bruyette & Woods note the informal pact—steady taxes in exchange for continued lending—has frayed. Rising rates curb credit demand, while higher yields boost banks’ net interest margins, creating a political paradox. KBW forecasts a revival of the sector‑specific corporation tax surcharge, potentially lifting it from 3% to 8%, a level that would shave roughly 6% off NatWest and Lloyds earnings.

Chancellor Rachel Reeves avoided the topic in a recent executive meeting, yet a policy adviser warned that “bank taxes are never not under review”, a sentiment that can unsettle investors. With UK banks already trading at a discount to continental peers, renewed tax pressure could widen spreads and raise the cost of capital, tightening the credit pipeline just as households grapple with soaring energy bills.