The Autumn Budget and financial services: The long and the short of it

In summary

• There has been speculation around a range of tax rises on financial services in the Autumn Budget, from windfall taxes on banks to pension relief changes 
• Taxes targeting financial services firms can risk eroding the UK sector’s competitiveness, and added costs on customers could have long-term and unpredictable consequences  
• Potential impacts on consumer behaviours and implications for state spending will need to be carefully considered 

Rachel Reeves faces tough choices at the Autumn Budget. Constrained by slow growth and her fiscal rules, she faces having to find as much as £51 billion in additional revenue or spending cuts. Few doubt the Budget will bring tax rises. The only question is where they will fall.  

Recent speculation and hints from the government suggested we could see Reeves break manifesto promises and even raise the basic rate of income tax. That now may be off the table again. Since before last year’s Budget, however, it’s been the government’s position that the burden should be on those with the “broadest shoulders”.

That leaves the UK’s financial services sector, a global leader in insurance, banking, asset management and capital markets, firmly in the firing line. In 2024, the industry contributed £281bn in gross added value – 12% of the UK’s total.  

Its shoulders are broad, but before the government leans too heavily on financial services to fill the Chancellor’s fiscal gap, it will be important that it has considered what the sector already carries. While the sector has an obvious role to play in supporting the public finances, there's a danger in pushing this too far.

Budget speculation on potential tax rises for the sector can be broadly categorised into two groups: taxes targeting the sector directly, which will impact its international competitiveness; and those on or related to the services the industry offers its customers. The impact of the latter is more difficult to predict, but potentially longer lasting and more damaging.  

The government could end up paying a high price for short-term fiscal gains. 

Even direct taxes carry real risks. Calls for a windfall tax on the big banks tend to be politically popular and could raise £11 billion, according to activists. An increase in the bank corporation tax surcharge on profits (proposed in a leaked memo by the former deputy prime minister before the Spring Statement) has attractions, too: It would enable Reeves to raise funds, without breaking her promise to maintain the main corporation tax at 25% throughout this parliament.

But while retail financial services might be relatively sticky from a tax perspective, being tied to its UK consumer base, capital is mobile. The UK’s financial services businesses compete in a global market, and the higher taxes go, the further down the list the UK moves when investors consider where to deploy their capital even if tax is only one of many factors they will consider. London remains a global financial services hub, but its status can’t be taken for granted. In September, for instance, Bloomberg reported that London had slipped out of the world’s top 20 IPO markets in the third quarter, overtaken by Mexico and Singapore.

High taxes don’t help. UK Finance’s submission to the last Budget detailed the growing burden the sector bears, with London’s total tax rate already well ahead of its rivals in Amsterdam, Frankfurt and Dublin. The financial services sector is already doing much of the heavy lifting for the government, accounting for a quarter of all corporation tax receipts.   

Such arguments seem to be behind more recent reports that the Chancellor has decided against increased taxes on UK banks. “Banks are already paying a lot of tax," one insider told The Financial Times.

Even without further changes in the Budget, though, some in the financial services sector face an increasing burden from measures announced in the previous Budget. Carried interest tax changes from April 2026, for instance, will increase rates on the profits taken by general partners in the private equity, venture capital and hedge funds. This will also require the funds to revisit how they report carried interest distributions – an added burden on the private capital that plays a vital part in the UK’s financial services sector. 

It’s the second set of potential policies that could cause greater long-term challenges, however – not just for the financial services sector, but also for the government and potentially the country. The impact on socio-economic behaviours of changes to the tax regime around critical financial products is difficult to predict, and that should make the Chancellor cautious.  

Pensions are perhaps the best example. In the UK, more than most of its neighbours, private pensions provide a standard of living in retirement beyond that which the state alone can provide, with both individuals and employers (in the case of occupational pensions) and the state (through tax relief) sharing the cost.  

The previous Budget has already brought pensions within the scope of inheritance tax from April 2027. Reductions in relief on pension contributions, which cost the government over £50 billion annually, or cuts to the tax-free lump sum, would further reduce the attractiveness of retirement savings. Reforms to salary sacrifice would also mean lower saving.

Critically, even modest changes that reduce, rather than remove, benefits could have an outsized impact on individuals’ willingness to save. Pension saving is a long-term commitment, and implicit in the choice to put money by is the confidence that successive governments will not take action that erodes the value of those savings. If that confidence is lost, it will be difficult to rebuild, especially for Gen Z now entering the workforce. We could see a sea change in the flow of funds from pensions into other investments, such as crypto, with greater allure and the promise of much quicker gains – and greater risks.  

This isn’t just a problem for the pensions industry, or even the individuals affected. The UK has traditionally spent less public money on pensions than comparable countries, a situation enabled by the private pensions sector picking up the slack. Tax changes that undermine confidence in that system could have long-term costs that are thrown back on the state. 

Pensions are far from the only example. Other private savings and investments are vulnerable, too. The Chancellor has ruled out radical cuts to the ISA allowance, for example, but more modest changes to push investors into stocks instead of cash, should be carefully considered for the behaviour they could drive – and changes they could bring in individuals’ reliance on the state. There may be good reasons for individuals to save more into shares than cash, but the government is not necessarily best placed to determine this.   

Similarly, just as savings and investments do, insurance plays an important social function. Without further changes in the Autumn Budget, insurance premium tax is already due to raise almost £46bn from 2024/25 to 2028/29, with receipts up 9% in the last financial year. But insurance’s primary role is not as a revenue generator for the Treasury, nor even profits for the industry. It is to provide essential protection for individuals and businesses against losses that they could not confidently bear alone. 

The financial services sector’s success make it a tempting target for a Chancellor look to raise tax revenue. However, short-term political requirements to balance the books must be balanced by a long-term perspective of its vital role.  

The strength of the UK financial sector means that it does have broad shoulders. But the Chancellor will need to consider how much of a greater burden it can and should bear in her Autumn Budget.