The Robin Hood Optics and Politic Allure of Windfall Taxes
Few fiscal ideas are as politically seductive as the windfall tax. They are easy to explain, headline-friendly, and can be framed as an act of fairness: take excess profits from corporations and redirect them to public services.
Energy firms have already been targeted, after global oil and gas prices surged. Now attention has turned to the banks.
Since 2021, banks’ profits have more than doubled. Interest rates jumped from near-zero to above 5%, and lenders widened their margins, charging borrowers more while passing little of the benefit onto savers. It’s not that banks suddenly became better businesses. They simply found themselves in the right place at the right time.
To politicians, this makes windfall taxes look like a Robin Hood policy: claw back profits from the banks and use them to fund the NHS, schools, or welfare…
But the reality for small businesses is far less romantic.
What is a Windfall Tax, Really?
A windfall tax is a one-off levy on extraordinary profits, the kind that come from external shocks or quirks in the system, rather than hard work or innovation.
Energy companies: reaped record profits when oil and gas prices spiked.
Banks: are now profiting from a widening net interest margin, the gap between what they charge borrowers and what they pay savers, as Bank of England base rates have risen sharply.
The principle is simple: if profits weren’t “earned” in the usual sense, companies should contribute more back to society.
But here’s the catch: banks don’t absorb new taxes quietly. They protect their margins. And that protection comes at the expense of their customers, particularly small businesses.
Why People Should Care
When any business, including banks, face extraordinary levies, they don’t simply accept lower profits. They shift the burden:
Loans and overdrafts become more expensive.
Credit conditions tighten, making it harder for small firms to be approved.
Fees and charges on business accounts creep upwards.
Large corporates can often bypass banks by tapping bond markets or overseas lenders. Smaller businesses cannot. Their reliance on bank finance makes them especially vulnerable to the second-order effects of windfall taxation.
So while the headlines will trumpet “billions raised for public services,” and politicians attempt to garner public clout, the quieter story is that small businesses end up footing the bill through higher costs and reduced access to credit.
The Numbers Don’t Add Up
At first glance, taxing banks looks like a fair and proportionate response to their swollen profits. But here’s the twist:
The government is already handing banks far more money than it could ever hope to claw back.
The QE Subsidy Problem
When the Bank of England launched Quantitative Easing (QE), it created new reserves held by commercial banks. Those reserves are paid interest at the Bank’s base rate.
At near-zero rates, this was barely noticeable.
But at today’s rates of 5%+, the cost is enormous.
The Treasury now pays around £22 billion a year to cover these QE-related interest costs.
Much of this flows directly into commercial banks’ coffers. It is, in effect, a taxpayer-funded subsidy paid directly to banks.
Windfall Taxes vs QE Subsidies
This is where the optics fall apart.
Proposed windfall tax take: £7–8 billion a year.
QE subsidy cost to taxpayers: £22 billion a year.
Net position: Banks remain £14–15 billion better off each year, even after a windfall tax.
In plain English: the government writes banks a cheque for £22 billion, then when banks have huge spike in profits, asks for £7 billion back, and calls it fairness.
This is why windfall taxes are less about solving problems and more about headline politics. They make governments look tough on banks while leaving the structural leak untouched.
Fix the Root, Not the Symptom
If policymakers are serious about fairness, taxing banks after the fact is the wrong lever. Instead, they should:
Reform QE arrangements so taxpayers aren’t underwriting bank profits through reserve interest.
Demand more accountability in how banks use profits, ensuring they are reinvested in cheaper financing, fairer facilities, and positive community outcomes.
Encourage competition so smaller lenders and fintechs can challenge the dominance of the major banks, creating more choice for smaller businesses and wider public.
Only by addressing the system itself can we stop public money flowing into bank balance sheets, and only then can smaller businesses see a fairer deal.
Don’t Be Distracted by Headlines
Windfall taxes on banks sound like justice. They appeal to the public mood and give governments a chance to look decisive. But the numbers don’t lie:
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Banks are making record profits by widening interest margins.
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They are also receiving £22 billion a year in taxpayer-funded QE subsidies.
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A windfall tax would raise a fraction of that, leaving banks net winners while the wider public, and especially small businesses, pick up the hidden costs.
For SMEs, the lesson is clear: don’t be fooled by political optics. Until the QE leak is fixed, and banks are held to account for how their profits are used, windfall taxes will remain what they have always been: a slogan, not a solution.
