John Healey is set to clobber banks with higher taxes - despite hailing them as a ‘jewel in the crown of the British economy’.

Industry figures fear he will hike the levy from the current level of 3 per cent to 8 per cent - despite warnings it will push up the cost of borrowing for businesses and mortgage borrowers and hit the economy.

There are also concerns that a windfall tax could encourage international banks to shift their London and UK operations overseas.

Speaking on the sidelines of the International Monetary Fund meetings in Bangkok, the Chancellor said banks are ‘a big contributor to the economy’ and ‘an important part of our business’.

The comments sparked hopes he may resist calls from unions and Labour MPs to hammer lenders with higher taxes in the Budget this month.

However, he refused to rule out such a move, leaving the City on edge ahead of his maiden Budget on October 28.

And speculation is mounting that he will increase the levy banks pay on their profits over and above corporation tax, as he faces intense pressure to balance the books.

UK Finance, the trade body for the banking sector, said banks already make a 'major contribution to the public finances and already face a materially higher total tax rate in the UK than in other leading financial centres.'

It warned further increases to bank taxes 'would weaken the UK’s competitiveness, discourage investment and job creation, and work against the government’s ambition to deliver growth in every postcode.'

Shadow chancellor Andrew Griffith said: ‘Britain needs growth. But a raid on the financial services sector will stifle it. Labour should be backing businesses and wealth-creators, not making their lives even harder. Instead of casting around for more businesses to tax, all John Healey’s efforts should be on out the out of control welfare bill.’

Reform UK Treasury spokesman Robert Jenrick said: ‘John Healey is speaking with a forked tongue. You cannot praise banks with your right hand while picking its pockets with your left. He’s tied himself in knots because he’s too weak to deliver the welfare reforms we desperately need.’

Shares in UK banks fell in early trading, with Lloyds Banking Group down nearly 2 per cent, NatWest 0.22 per cent lower and Barclays slipping 0.16 per cent. 

‘My observations on the banks are just that people too often see them as big distant financial institutions, when they are hardwired into the economic fabric,’ Healey said at the IMF.

‘That said, I’ve got decisions to take in the Budget, and I’ll set those out in two weeks’ time.’

The Trades Union Congress has called for ‘a windfall tax on bank profits to fund cuts to energy bills for everyone on low and middle incomes’.

But the industry has warned against such a move, suggesting it will push up the cost of doing business and in turn the cost of borrowing for millions of households and businesses.

In a hard-hitting letter to the Chancellor last week, a coalition of influential business groups warned a tax raid could backfire by sparking an exodus from Britain.

‘As well as weakening investor confidence and damaging UK attractiveness, a higher tax burden may not necessarily generate higher tax receipts if capital, people and businesses move elsewhere,’ the letter said.

It echoed comments from JP Morgan boss Jamie Dimon, who said he would scrap the bank's plans to build a £3 billion HQ in Canary Wharf. 

The surcharge on banks was cut from 8 per cent to 3 per cent under Rishi Sunak at the same time that corporation tax was raised from 19 per cent to 25 per cent. 

It is thought returning the surcharge to 8 per cent could raise around £2billion a year.

UK Finance has called for ‘a stable and predictable tax environment for banks’ and warned that ‘further sector-specific taxation would reduce the sector’s ability to lend, invest and support the wider economy’.

It has warned that a fresh tax raid will make the UK even more of an international outlier, pointing out that UK banks are currently taxed at a rate of 46.5 per cent once employment levies and VAT are taken into account. That compares with 39.1 per cent in Frankfurt and 27.9 per cent in New York.

Speaking last month, UK Finance chief David Postings said: ‘I think already we’re very highly taxed. To go further than that, really I think would reach a tipping point and would be very risky on the part of the government.’

Neil Wilson, investor strategist at Saxo, said Healey’s comments in Bangkok had ‘suggested windfall taxes were less likely’.

‘He described banks as the “jewel in the crown” of the UK economy. A romantic flourish perhaps but one that I suggested did not shout a hike to the bank surcharge is in the offing,’ said Wilson.

‘But today bank stocks got the treatment after a report that the Chancellor is now likely to hike the bank levy. Classic Budget rumours.’

Wilson said a return in the bank surcharge to 8 per cent ‘is not of the question but added: ‘Today’s higher rate of corporation tax, up from 19 per cent to 25 per cent, means a rise to 5-6 per cent is more likely’.

He said: ‘Already UK banks face a higher rate of tax than elsewhere. There are strong countervailing arguments to raising bank taxes. One of these is hobbling UK's competitiveness vs the likes of Frankfurt and NY, which could further narrow the tax base by attracting labour and capital away from the City.

‘The other major worry is that raising taxes on banks would hurt lending to businesses and consumers.’

Russ Mould, investment director at AJ Bell, said: ‘Banking shares took a hit after speculation that Chancellor John Healey would increase tax on the sector.

‘Barclays, Lloyds and NatWest all saw their share prices fall after reports that Healey might increase the current 3 per cent surcharge on top of corporation tax back to the 8 per cent level last seen in 2023. Doing so could potentially raise around £2billion a year for public finances.

‘Banks joined gambling firms and oil and gas producers in protesting against the idea of higher taxes in the UK, arguing such action could discourage investment and lead to job cuts. That would be counterproductive to the government’s drive to grow the economy.

‘The government might argue that banks are doling out significant amounts of money in dividends to shareholders, implying there is plenty of scope for them to pay a little bit more tax. The flipside is that any hit to dividends to offset higher taxes would penalise the large number of people in retirement who invest in banking shares for income.’

As well as praising the banks, Healey sought to calm jitters on the bond markets that have pushed UK government borrowing costs to the highest level for 28 years in recent weeks.

He insisted he will ‘meet’ the fiscal rules ‘in full’ while also hinting at support for families and businesses in the Budget.

‘I've been very clear, also, the Prime Minister talked about recognising the cost of business, not just the cost of living,’ said Healey.

‘And so, I want the Budget to be a Budget that gets Britain a bit of breathing space. But also, reinforces the strength of our fiscal plans.’