Britain’s government should start taxing banks on the hefty sums they earn from money parked at the Bank of England, according to a leading think tank.

The Institute for Public Policy Research (IPPR) says banks are receiving about £22 billion a year in interest payments on reserves held at the BoE — money it argues is effectively a taxpayer-funded subsidy that could otherwise support public services.

“This began as an emergency measure to help the economy, but it’s now become a massive drain on public money,” said Carsten Jung, associate director for economic policy at IPPR. “Because of how the system is set up, cash is flowing straight into the coffers of commercial banks.”

The reserves system was created during the 2008–09 financial crisis, when the BoE bought up government bonds through quantitative easing (QE). Banks were left with huge reserves at the central bank, which earn interest at the BoE’s main policy rate. With rates now much higher than during most of the QE era, those payouts have ballooned.

The Treasury is ultimately responsible for covering losses at the central bank, meaning taxpayers foot the bill.

The IPPR says introducing a targeted tax on this interest income would give finance minister Rachel Reeves more room to meet her fiscal rules — without immediately squeezing households and businesses. Reeves is widely expected to raise taxes again in her autumn budget after already hiking them on employers last year.

Not everyone agrees with the think tank’s proposal. Bank of England Governor Andrew Bailey has repeatedly defended the current system, arguing it’s vital for transmitting changes in interest rates across the economy. Earlier this summer, he pushed back against criticism from politicians, including members of Nigel Farage’s Reform UK party, over the growing cost of QE.

Even so, pressure for reform has been building for years. In 2022, former BoE deputy governor Paul Tucker suggested the government should rethink whether banks should be paid full interest on their reserves.

For now, the debate remains unresolved — but with billions at stake, the calls for change are only getting louder. Photo by acediscovery, Wikimedia commons.