Bank tax raid risks squeezing the firms Britain needs

Tax the banks and small businesses could foot the bill

Bank tax raid risks squeezing the firms Britain needs

Tax the banks and make the big boys pay. It sounds like an easy win for the Chancellor, but small business owners should watch their wallets. If lenders respond with dearer loans and tighter borrowing rules, the firms he needs to drive growth could end up footing part of the bill.

IT’S NOT THE BANKS THAT WILL PAY FOR TAX ON THE BANKS

If the Chancellor taxes the banks, the banks won’t pay the price. The UK’s vital small and micro businesses will be collateral damage.

Shares in the UK’s biggest banks have fallen this morning (16th Oct 26) after new reports suggest the chancellor is set to raise taxes on lenders. Natwest, Lloyds and Barclays shares all fell when the markets opened at 8am.

The left of the Labour party and the trade unions want higher taxes on the sector in a flurry of speculation it is being reported that the Chancellor has decided to give in and go after the banks in the Budget on 28th October, for cash to help balance his books.

It sounds bold and fair to anyone who thinks raising money for public services is simply a matter of making the big guys pay. However, there’s always another side to the coin.

Banks won’t absorb new taxes. They will pass them on and the people they pass them on to are usually the people who borrow from the banks, in particular businesses. The small and micro businesses, already fighting for survival could find themselves strangled for the want of cash.

Already on Life Support

Before any new tax lands, the lending picture looks bleak:

• Small business loan approval rates at the big banks are below 60%

• Net lending to small firms has been shrinking

• And banks have tightened their criteria since the pandemic, with impact as far back as the 2008 crash still being felt

• Alternative finance now covers 35–40% of lending to small and micro businesses because traditional banks have stepped back.

Dropping a banking tax into this fragile ecosystem will create waves rather than ripples.

Lending Less

It’s highly likely that if you tax the banks more, they will lend less. I’m not an economist or banking analyst but I can see that this has been the result in the past.

Lending criteria tightens

Banks respond to new taxes by reducing their own risk. That means they hand out fewer unsecured loans, impose stricter affordability checks, reject more applications from micro businesses because they see them as risky by default, and they demand higher collateral such as personal guarantees which put owners’ homes at risk and already puts businesses off borrowing.

If you’re a founder without assets you can put up as collateral, you’re the first to be rejected for your bank loan. Without loans, businesses have to look elsewhere to alternative lenders or simply shelve any growth plans.

Interest rates rise

Banks protect their own margins first and a new tax will mean higher loan rates, and more expensive overdrafts and credit lines. For a micro business that needs to borrow £25,000 to update equipment even a 1–2% rise can make the loan unaffordable, so there’s no updated equipment and everyone loses out on increased productivity and growth that doesn’t happen.

Photographer: rupixen Unsplash photo ID: Q59HmzK38eQ

Challenger banks get squeezed

Challenger banks like OakNorth, Allica, and Tide, have become lifelines for small and micro businesses, but they have smaller balance sheets and rely heavily on lending margins. A banking tax hits them harder than the big players, so they may lend less. If challengers pull back, small businesses lose their most accessible lenders, with another blow to growth we so desperately need.

Alternative finance becomes the default

Invoice finance, asset finance, online lenders all have a role to play and are already filling the gaps. However, they aren’t for every business as they’re often more expensive, less flexible and unsuitable for many micro businesses. A banking tax pushes more founders into high‑cost finance they never wanted and may not be able to afford for long.

The Real Impact

Less Lending, higher Costs and more failures are likely to be on the agenda, which means less of the growth the Government, the economy and communities need.

If the Chancellor goes ahead, expect:

A smaller lending market where banks lend less to small business,

higher borrowing costs where loans become more expensive, even for stable firms

And slower growth because business owners delay taking on people, expanding, investing and innovating yet again.

Survival

A business with fragile cashflow is less likely to be able to borrow and failure rates are likely to rocket. The UK already has the lowest five‑year survival rate when compared to the EU and the US. A banking tax risks pushing us even further down the survival list.

A banking tax could have the opposite effect to the one the Government really, really needs. We need more businesses growing and paying more tax to finance our public services. A banking tax could thrust the UK economy into reverse. It could raise money for the Treasury, but it will strangle the lending pipeline that keeps our crucial small and micro businesses alive. Banks won’t pay the price; business owners and founders will. If the Chancellor wants revenue and growth, small and micro business lending has to be encouraged and protected, or he will have to add into his budget other ways of cutting costs for small and micro businesses so they can balance their books.