Bank levy to be delayed and lower than City feared

Banks will be hit by a £2 billion tax levy on their lending books from the start of 2011. The move ensures that they pay for the damage they did to the economy in the financial crisis.

But the hit is not as large as it might have been with commentators fearing the Chancellor could seek as much as £5 billion from the banks.

However, he made it clear a "financial activities tax" based on profits and bonuses is still waiting in the wings.

Osborne dismissed critics who said he should have waited until the whole of the G20 group of leading economic nations introduced a levy by saying he had today signed an agreement with France and Germany to go ahead with the tax.

The tax will be levied at 0.07% but will be at just 0.04% for the first year costing just over £1 billion. It applies to all UK banking groups and building societies with total loans over £20 billion. It is not levied on tier one capital or certain long-term debts.

Angela Knight, chief executive of the British Bankers Association, said: "The banking industry fully understands the part it must play in helping the UK's economic recovery.

"The banks are committed to working with the Government to ensure new bank levies balance tax-raising objectives with the need to keep the recovery moving, and for banks to contribute to economic growth through continued support for the wider economy by lending to businesses and individuals.

"This levy is to apply to all major banks and building societies operating in the UK regardless of nationality. We are a large financial centre and a great many jobs are created here as a result."