Business and Trade Committee call for evidence Financing the real economy

UK Finance Response 

12 September 2025

About UK Finance 

UK Finance is the collective voice for the banking and finance industry. Representing more than 300 firms across the industry, we act to enhance competitiveness, support customers and facilitate innovation.

We welcome the Business & Trade Committee’s inquiry into financing the real economy. This response builds on UK Finance’s earlier response to Department of Business and Trade and HM Treasury’s call for evidence on SME access to finance and the Business and Trade Committee inquiry into the Government’s Small Business Strategy. We have taken a thematic approach to reflect issues from the UK’s capital markets, debt finance providers and reflections on the tax regime.

If you have any questions relating to this response, please contact Jennifer Tankard, Principal, Commercial Finance, at jennifer.tankard@ukfinance.org.uk.  

Investment in the UK

Investment in equities

The UK is a leading global financial centre. With an established market ecosystem supported by robust institutions, a strong talent pool and a leading regulatory framework, the UK has a global reputation as an open international market and an attractive place to invest.

At the heart of this are the UK’s public and private capital markets, which provide a significant element of the funding UK companies need to operate, innovate and scale, in turn driving job creation and growth in the ‘real economy’.

However, the global financial services landscape is changing rapidly, driven by market behaviours, innovation and technological advancements. Over the past decade, we have seen two key trends in global capital markets:

     A significant growth in private markets. Global private markets are forecast to grow to £14.8tn by 2028

     A global weakening of public equity markets, coupled with US public equity markets increasing their relative share

This has created both challenges and opportunities for the UK economy and investment in recent years.

The increasing supply of domestic and international capital across UK private markets is a welcome and positive development. More capital means more companies can access the funding they need. Increasing flows of international private capital can also provide companies with wider opportunities to commercialise products across geographies.

However, whilst private capital is a welcome and important source of funding for UK companies, the UK also needs strong public markets. Companies staying private for longer, reduces the flow of companies to public markets for investors and limits the benefits to the real economy of a thriving equity market.

UK public equity markets have faced a number of well publicised challenges over the last decade. Declining allocations to UK public equity markets by institutional investors, a retreat of retail investors that outstrips other comparable jurisdictions, and the increasing influence of passive funds, have adversely impacted liquidity and company valuations. While significant progress has been made to address these challenges through the UK Government’s ambitious reform agenda, more remains to be done.

Furthermore, irrespective of how and where capital is raised, there are opportunities for more UK companies to access the capital they need to grow, with early stage and growth stage companies not always able to obtain appropriate funding and support at stages of their growth lifecycle (which can be referred to as the ‘growth escalator’). Funding gaps limit the growth and scalability of high-potential businesses, constraining economic growth and the pipeline of emerging private companies that could form the next generation of public companies.

UK Finance’s 2025 report on UK Public and Private Capital Markets suggests actions which policymakers can take to improve this position. Our key findings include the following:

     UK public capital markets are an important source of funding to UK companies, with public equity (share) capital still accounting today for over 80% of outstanding UK equity capital.

     UK public equity market capitalisation, however, is shrinking. The pace of new companies joining UK public markets is declining at a time when the number of companies leaving the market is increasing. As a result, the market capitalisation of UK traded companies has declined by 17% since 2013. The UK’s capital markets reform agenda seeks to address this.

     The UK’s private capital market ecosystem is strong, with private markets providing £1.2tn of existing funding. Venture capital has grown on a 20% compound annual basis between 2013 and 2024, private equity by 11% and private credit by 43%. There are two to three times more venture capital and private equity entities headquartered in the UK than in European peer markets, making the UK the largest private market outside of the US. This provides a wider choice of capital to UK companies.

     Companies are staying private for longer with less need to join public equity markets to fund growth. When they do join public markets, they do so at a later stage in their growth journey. HMT and the FCA have sought to address this through the introduction of a unique ‘cross-over market’ platform, known as PISCES (Private Intermittent Securities and Capital Exchange System). In August 2025, the FCA approved the London Stock Exchange to operate this platform, which could better connect both markets by enabling periodic trading of existing securities without full commitment to a public listing, making the full transition to public markets easier.

    Access to capital in the UK is not equal across companies, sectors and regions, resulting in a ‘scale-up funding gap’. Solving this will enable roughly 17,000 more companies to grow. These companies, most typically the SME market and the mid-market corporates (the ‘critical middle’), are the backbone of our economy and are key to economic growth and the future prosperity of the UK.

     Promising businesses are failing to fulfil their potential. Founders need support to scale a business and there needs to be more transparency around opportunities to invest and the range of funding available to UK businesses. Eleven per cent of UK businesses close each year and the five-year survival rate for newly established businesses founded in 2018 is just 40%.

Incentivising institutional investment in UK assets

Over the last three decades, there has been a measurable drift in UK institutional investors allocating capital towards debt over other assets. UK pension funds have also sharply increased their holdings outside of the UK, while reducing their holdings of assets such as UK equities. This has been driven by factors, including:

• Pension fund diversification, whereby fund managers in the UK spread risk across multiple global markets and sectors.
• The maturing of UK defined benefit (DB) pension schemes, which will generally focus on fixed income assets as their members retire. The rise of DC pension schemes in the UK with their younger members and need for capital accumulation is an important opportunity to plug UK savers back into a healthy culture of engaged long-term investment, but it needs to be supported by measures to support DC scheme consolidation to achieve the scale needed and incentives for investment in the UK.
• Regulation in the UK, which taxes trading in UK equities and often focuses on the cost of investment services to the consumer rather than the value of the service in terms of the net returns it achieves. This is linked to the general UK regulatory tendency to focus on removing risk rather than balancing risk and return.
• Liquidity and solvency regulation, which in effect discourages pension funds and other institutional investors from holding less liquid assets such as infrastructure.

The lack of investable assets in the UK has also been compounded by more than a decade of sluggish growth. Through that decade, annual returns in UK listed equity markets have often been half in the UK what they are in the US. The UK and Europe are also far behind the US in producing a steady flow of listed and unlisted infrastructure assets for general investors.

This has important consequences for the funding of UK companies and infrastructure, but also for returns, which are typically lower from fixed income assets over the long term. The UK now has the highest allocation to bonds and the lowest allocation to equities or other assets of any comparable pension system in the world.

UK Finance welcomes the ambition of the Pension Schemes Bill to shift the focus in our pension system from short-term cost to long-term value through a revised Value for Money framework, and to drive the consolidation of the private DC market and the Local Government Pension Scheme (LGPS) to facilitate greater investment in assets such as equities and infrastructure.

However, incentivising institutional investors to allocate more capital to UK equities and infrastructure specifically is important but not simple.

The basic fiduciary duty of any pension or investment manager is to deliver capital growth. Responsible managers of UK investments will seek out high-quality investments in an increasingly global market and diversify their investments to reduce risk.

While there are many legitimate reasons to prefer that these investments are in the UK, those allocations must ultimately be driven by underlying investability and the best sustainable returns.

Encouraging UK pension funds to choose the UK, therefore, requires a market-based approach.

That’s why we support the aim of the UK industrial strategy to boost the pool of strong, growing companies and commercial propositions that will keep that private capital in the UK. The better the UK gets at producing commercial technologies, high-quality companies and investable infrastructure propositions, the more capital will be allocated to them. Factors like access to talent and the need to manage an increasingly high tax burden are also important in helping shape the attractiveness and competitiveness of the UK.

UK Finance’s 2024 briefing, UK capital markets: a new strategic agenda, our 2025 response to the interim report of the Pension Investment Review, and 2025 report on UK Public and Private Capital Markets set out potential incentives to support UK pension funds – and investors in general – in holding UK assets as part of a responsible portfolio allocation strategy.

These include:

• The tax treatment of UK equities should be reviewed against treatment of equities in comparable markets.  There should also be a review of restoring the dividend tax credit for UK pension funds abolished in 1997 or introducing an Australian-style dividend franking regime.

• Government should explore the role that the National Wealth Fund (NWF) and the British Growth Partnership (part of the British Business Bank) could play in aggregating smaller infrastructure projects or UK unlisted equities into tranches suitable for pension funds.

• Government should review and address structural barriers to public-private and public-’public’ co-investment e.g. as part of the Pension Investment Review amend accounting rules to enable Local Government Pension Fund schemes to co-invest in projects with the NWF and BBB without an artificial cap on investment.

Small business investment

Business investment in the UK has been low for some time, particularly since the global financial crisis. The UK has had the lowest share of investment as a percentage of GDP among G7 countries for 24 out of the last 30 years. The UK ranked 28 out of 31 OECD countries for investment in 2022 and evidence shows that the lack of investment in capital is a key reason for the UK’s productivity gap with countries such as France and Germany.[1]

Muted levels of business investment in recent years are consistent with modest growth in gross lending to SMEs by main high street banks.[2]

UK Finance’s recent Business Finance Review highlights that 2025 Q2 marks the sixth consecutive quarter of year-on-year growth in gross lending by the main High Street lenders, continuing the gradual increase in new lending to SMEs since the lows seen in the second half of 2023. In the three months to June lending by the main banks totalled £4.24 billion. This growth aligns with the steady rise in new loan approvals also reported over the past year and a half.

However, the pace of increase in lending growth, at just over eight per cent compared with a year ago, eased further in 2025 Q2, down from 14 per cent last quarter and the slowest since the start of 2024. The easing in the pace of growth is not surprising given the economic backdrop. In the first half of this year businesses have faced into higher employment taxes, cautious consumer demand and significant volatility in global trade policy. Against this backdrop, business surveys have pointed to waning optimism and fewer companies report plans to grow which contributes to cautious investment plans and a potential pause or delay in borrowing activity.

At year-end 2024, the overall percentage of SMEs that met the definition of a ‘Permanent non-borrowers’ (PNBs) (those not using external finance and showing no inclination to do so) was 35%.[3] Likewise, Bank of England data found that around 75% of businesses agreed with the statement: ‘I would like my business to pay down debt/ be debt free’.[4] Survey evidence points to risk aversion as the main driver behind the lack of investment for smaller businesses and reluctance to borrow. The proportion seeing cash flow/ late payment as an issue has also increased.[5]

Anecdotally, members report that many SMEs pride themselves on being self-sufficient and financially independent. Taking on debt can be seen as a failure to manage finances effectively. As such, SMEs don’t always recognise the strategic value of borrowing or working capital management of cashflow and some worry debt conditions may affect their control and decision-making power.

The reluctance to use external finance amongst SMEs has led to reliance on internal and personal funds as a source of finance, particularly for investment purposes. Many micro enterprises use their own human and intellectual capital rather than physical capital to provide services to customers. Meanwhile, early-stage businesses, that are not in a position to borrow, may have access to raised funds and other alternative forms of finance.

Businesses are now depositing more with banks than they are borrowing from them.[6] SMEs have around £270 billion available in deposit and business bank accounts, compared to the stock of SME lending on loans and overdrafts of £180bn.[7] Recent figures suggest that the overall SME market is liquid, with funds available to invest should SMEs wish to do so, with 29% of SMEs holding more than £10k in credit balances.[8] This reliance on internal limits SMEs’ ability to scale quickly or respond to market opportunities

SME’s need support and encouragement to grow and invest. From a policy perspective, government has consistently sought to intervene with supply-side debt and equity solutions but has focused less on demand-side stagnation. This is seen through measures such as the British Business Bank’s Investment Funds, Start Up Loans, Government Loan Schemes, the Bank Referral Scheme and mandated Credit Data Sharing. 

Business Lending

Access to Finance

Banks and finance providers have the capacity and willingness to support new and existing viable SME customers. A key development in recent years has been the increasing diversity in the SME Finance market, across both provider type and finance type with 60% of new lending by value now done outside of high street banks.[9] Consequently, there is robust competition for new business.

Debt finance is one of a wide range of products available to SMEs. There are many other products that may be more appropriate depending on the size of business and purpose of funding. New channels for seeking funding using technology and innovation, such as on-line eligibility tools, are also transforming the ease of SMEs to shop around and compare options when looking for external finance. Lenders provide a wide range of channels for business engagement, including telephony, digital channels and relationship managers for some SME cohorts.

For credit worthy SMEs, the challenge is one of demand rather than supply. That being said, research has indicated that there are barriers to business demand for and access to debt finance, many of which are compounded.

Business profile can affect the accessibility of finance. Micro businesses are the least likely to use finance, for example, with only 42% of SMEs with 0 employees reporting using any external finance in Q4 2024 compared with 55% of SMEs with 10-49 employees.[10] Smaller SMEs generally have lower acceptance rates, reasons for which include typically lower credit profiles, the increased probability of default and a lower capability to service additional debt.

Younger and high-growth businesses often lack the tangible assets required for traditional debt finance, limiting their growth opportunities. Industry recognises that knowledge-based, intellectual property (IP) rich businesses can struggle to access the finance they need.  While most banks lend to IP companies, SMEs can find it difficult to leverage their IP assets to secure commercial loans.[11]

Some lenders are already taking action to address this, for example NatWest has a unique lending proposition to enable business to leverage the value of IP and HSBC has a specific Growth Fund that looks to help high-growth tech firms to take off through Growth Lending, with a £350m pool of assets.

Elsewhere, underserved communities may face additional barriers when accessing finance due to a lack of tailored support and systemic inequalities within the financial ecosystem. There is now a considerable body of evidence setting out the challenges faced by certain market segments, including female, ethnic minority and disabled entrepreneurs. Many lenders have put in place a wide range of targeted activities to support these groups and others, including armed forces veterans. For more information please see: 

• Investing in Women Code Annual Report 2024 and 2025. 

• UK Finance’s report Supporting Ethnic Minority Entrepreneurship in the UK (2022) 

• UK Finance’s report on Disability Finance Code for Entrepreneurship (2025) 

In addition to targeted support for entrepreneurs, many financial service organisations also already provide a range of support and advice including targeted activities such as investment readiness and mentoring schemes. For example:

• NatWest’s partnership with Digital Boost, a platform which connects individuals with mentors via unlimited one-to-one conversations tailored to their needs, free of charge.
• Santander’s Breakthrough programme organises multiple in-person and digital events to support SMEs.

    Bibby Financial Services' Knowledge Hub provides a wide range of information and advice.

• Lloyds Bank Academy offers financial and digital training through on-line services.
• Barclays Eagle Labs incubates, inspires and educates UK founders, startups and scaleup.
• HSBC has recently launched a Small Business Growth Programme, designed to help SMEs get started, build financial health and resilience, and grow.

Government has also taken steps to improve its business support and investment readiness offering. We welcomed the Government's decision to launch the Business Growth Service, confirmed in the recent Plan for Small and Medium-Sized Businesses. We have called for it to focus on providing a one stop shop for business support and advice while also tackling fragmentation. The Service needs to be supported by a comprehensive awareness raising campaign with SMEs and a plan for driving traffic to the service. Small and medium businesses are varied and diverse in nature, with support and advice needs varying considerably. The success of the Business Growth Service will be dependent on appropriate tailoring of support and advice.

Elsewhere, policies like guarantee schemes and targeted support that promote lower cost lending products can encourage cautious SMEs or those outside the scope of traditional lending to explore borrowing opportunities, and more SMEs to increase borrowing in a controlled but growth-oriented manner. We were pleased to see our recommendations to put the Growth Guarantee Scheme on a longer-term footing. These schemes can be targeted to achieve a certain type of growth, for example, to accelerate green growth or high potential technology startups. 

Government should also empower the British Business Bank (BBB) to stimulate demand through targeted interventions. The BBB’s Power of Partnership (PoP) project, if developed and enhanced as a one stop resource for SMEs, could help to build financial confidence by providing diagnostic, triage and educational resources.  Government should ensure this is joined up with work on the Business Growth Service to avoid fragmentation.

Regulatory burden

Since the financial crisis, there has understandably been a move to reduce, or even eliminate, risks for consumers, directly and indirectly as taxpayers, SMEs and other segments. This significant amount of regulatory change applicable to lenders, undoubtedly impacts on business sentiments and demand for finance. 

The financial crisis precipitated reforms to the structure of banks (e.g. resolution and recovery planning), their capital and liquidity requirements (e.g. Basel II and III standards, countercyclical and other capital buffers, leverage ratio, Liquidity Coverage Ratio or “LCR”) and the conduct of their employees (e.g. senior managers and certification regime). The UK’s regulatory approach has often gone beyond other countries with additional layers of reforms.  For example, through the ringfencing regime and the Consumer Duty.

Meanwhile over the same period, the regulatory framework for financial services in the UK has become more complex.  Multiple regulators and public bodies now have remits that touch the sector, but no single body has overarching responsibility. There has also been a growth in the number of codes and charters applicable to SME lending, increasing the compliance burden for firms.

Less complex and layered regulation, striking a better balance between risk, financial stability and customer protection, would encourage banks to devote more of their resources to growth-driving activities, helping to further support business lending.

For more information on our specific financial regulation asks on prudential and conduct regulations, and reform of the Consumer Credit Act and Consumer Duty please see UK Finance’s response to DBT and HMT call for evidence on access to finance Question 14.

Tax regime

Effects on capital formation

The UK’s taxation of the banking industry influences capital formation by shaping banks’ post-tax return on equity (ROE), weighted average cost of capital (WACC), and capacity to expand risk-weighted assets (RWAs). The three principal elements – the Bank Corporation Tax Surcharge, the Bank Levy, and irrecoverable VAT – function cumulatively to increase the marginal cost of intermediation, affecting credit supply and investment flows.

    Bank Corporation Tax Surcharge - On top of the 25 per cent main rate of corporation tax (CT), the 3 per cent surcharge results in an effective statutory rate of 28 per cent for banks with profits over £100 million. Bank Surcharge receipts were £1.5 billion in financial year 2023 to 2024[12], which combined with the CT receipts of the sector amounted to £10.8 billion in total.  According to the European Central Bank[13] (CON/2023/26), such sector specific surcharges risk impairing banks’ ability to generate retained earnings, thus constraining CET1 capital growth.

    Irrecoverable VAT - Unlike most businesses, financial services providers cannot fully reclaim VAT on inputs due to the sector’s VAT exemption[14]. This creates an additional cost burden (estimated at £4.6 billion for the banking industry in the financial year 2023/24[15]), effectively acting as a hidden tax. Irrecoverable VAT reduces banks’ net margins, potentially limiting their ability to reinvest in lending and capital markets.

    Bank Levy - Applied to the balance sheet liabilities above £20 billion, the bank levy raised £1.4 billion in the financial year 2023/24[16]. While the levy is not calculated on profits directly, similar to irrecoverable VAT, the bank levy creates an additional cost burden for banks operating in the UK, limiting their ability to reinvest in lending and capital markets.  

While not directly targeted at banks the level of employment taxes also has a significant impact on the amount of retained earnings available for capital formation.

While the UK has clear and supportive tax rules for capital instruments, bank taxes and levies can diminish banks' ability to generate and retain capital. In PwC’s annual Total Tax Contribution of the UK banking sector report, the analysis includes the profile of value distributed by the survey participants. It shows that the Total Tax Contribution paid to government represents the largest proportion of the value distributed at 39.2 per cent (taxes borne, such as the surcharge, bank levy and irrecoverable VAT accounting for 22.6 per cent and taxes collected, such as employment taxes, representing 16.6 per cent of the total). This compares with 33.9 per cent paid to shareholders as dividends or reinvested back into the business, and 27.0 per cent paid to employees as wages and salaries (net of employment taxes). High effective taxation reduces banks’ retained earnings, which are a main source of capital formation.

While the industry understands the fiscal constraints related to taxation, it must be understood that excessive sectoral taxation risks harming UK competitiveness as well as impairing banks’ ability to support economic growth.

Additional taxation of the banking sector, over and above normal corporate taxation, inherently influences investor behaviour and capital allocation. For example, recent media reporting of a think tank’s recommendations to increase taxation of the sector resulted in a pronounced market reaction, underscoring the investor community’s negative assessment of the proposals and the damaging impact of uncertainty and speculation related to bank taxation.

The lack of dividend withholding tax aids capital allocation however there could be more reliefs available to aid investor behaviour and capital allocation particularly for the Banking sector.