UBS warns proposed bank tax would raise mortgage costs for UK homeowners

**Lead**

A proposed increase in the tax burden on British banks would inevitably lead to higher mortgage costs for homeowners, according to a new analysis from the global investment bank UBS. The warning comes as the Treasury considers options to raise revenue from the financial sector to help plug a significant hole in the public finances. The report, issued to clients this week, argues that lenders would have little choice but to pass on the additional costs to borrowers, making the dream of homeownership even more distant for many and raising the cost of living for millions of existing mortgage holders.

**Context**

The UK banking sector currently pays a surcharge on profits above a certain threshold, in addition to corporation tax. In recent years, the government has reduced this surcharge from 8% to 3% to maintain the competitiveness of the City of London. However, with the public finances under severe strain following the pandemic, the energy crisis and rising debt interest payments, the Treasury is reportedly exploring a reversal of that cut or the introduction of a entirely new levy on bank balance sheets. Such a move could raise billions of pounds for the exchequer, but UBS warns that the net effect on the wider economy may be negative.

The analysis, which draws on publicly available financial data from the six largest UK lenders, estimates that a one percentage point increase in the bank surcharge could reduce the sector's aggregate net profit by roughly 7%. While banks have some capacity to absorb such a hit, UBS notes that they are operating under increasing regulatory pressure to hold more capital and maintain prudent lending standards. In this environment, the most direct way to protect returns would be to raise the price of credit. The report specifically points to the mortgage market, where margins are already compressed by intense competition and rising funding costs. Any additional cost would almost certainly be reflected in higher interest rates on new loans and potentially even on existing variable-rate products.

The Bank of England's Financial Policy Committee has repeatedly warned that the UK banking system remains vulnerable to shocks, but it has also argued that a healthy level of competition in the mortgage market is essential for financial stability. A tax that disproportionately affects mortgage lending could distort the market and reduce the availability of credit to households, particularly first-time buyers and those with smaller deposits. The timing of UBS's warning is particularly sensitive, as the housing market is showing signs of stabilisation after a sharp correction in 2023 and 2024. Mortgage approvals have picked up, but affordability remains stretched, with house prices still high relative to average earnings.

**Analise**

Why does this matter? The debate over bank taxation is not merely a technical argument about fiscal policy; it strikes at the heart of the government's dual commitment to fiscal responsibility and economic growth. On one hand, the Chancellor must find ways to reduce the deficit without inflicting further harm on an already sluggish economy. On the other, any move that raises the cost of mortgages risks undermining the housing market, which is a key driver of consumer confidence and wealth. The UBS analysis provides a stark reminder that the burden of corporate taxes is not always borne by shareholders; it can be shifted directly onto customers. For a government that has promised to build 1.5 million homes and help more young people onto the property ladder, a mortgage cost increase would be politically damaging.

From a broader economic security perspective, the proposed tax could have unintended consequences for financial stability. Higher mortgage costs increase the risk of defaults and arrears, particularly among households that are already stretched by high inflation and stagnant real wages. This, in turn, could require banks to set aside more capital for bad debts, further reducing their capacity to lend. The Bank of England might need to take these dynamics into account when setting interest rates, potentially complicating the path of monetary policy. UBS concludes that while the tax may seem like an easy target for raising revenue, the second-order effects on the economy could outweigh the fiscal benefit. They suggest that policymakers should instead consider measures that do not directly penalise the extension of credit, such as a windfall tax on non-lending income or a reform of the surcharge that exempts mortgage-related profits.

**Fontes**

This article is based on a report by UBS Global Research, dated October 2025, which analysed the potential impact of a change to the UK bank surcharge. Additional context was drawn from the Bank of England's Financial Stability Report (July 2025) and public statements from HM Treasury officials on the fiscal outlook. No direct quotes from individuals have been used, as the analysis is attributed to the institution. The figures cited regarding potential profit impacts are based on the scenarios modelled by UBS and are presented as estimates rather than definitive predictions.