Alistair Darling will impose a one-off "supertax" on big bonuses paid to individual bankers but has ruled out a windfall tax on banks' profits.
The Chancellor will announce his plan to claw back excessive bonuses in his pre-Budget report tomorrow. His officials are still drawing up the scheme in the hope of stopping bankers finding a loophole such as incorporating bonuses into basic pay.
Options include a special higher rate of tax, in excess of the 50p top rate of tax on incomes above £150,000 taking effect next April. It would apply for one year only and to all banks, not only the Royal Bank of Scotland and Lloyds Banking Group in which the Government has a stake. Treasury advisers believe the supertax could deter some banks from paying huge bonuses. They denied the plan was a last-minute panic move prompted by public outrage over RBS's proposal to pay £1.5bn in bonuses to its investment division.
Mr Darling does not want to tax banks rather than bankers as that would hinder the Government's drive for them to rebuild their capital. He has also rejected a Tory plan to change the way bank losses are offset against tax.
The Chancellor will present his one-off raid on bankers' bonuses as part of a "fairness" agenda running through his PBR. Close allies dismissed charges of cheap populism, insisting that most people would regard it as unfair for people who were only in jobs because taxpayers' money saved the banks to walk away with large bonuses. They dismissed warnings that the best bankers would quit Britain or that the human rights of bankers might be infringed. "What about the human rights of the rest of us? Bankers are giving us a two-fingered salute," said one senior Treasury source.
But the clawback plan has already provoked a furious reaction in the City of London – it was dubbed "populist, punitive and penal" – and there were warnings that the City's position would be undermined.
Angela Knight, chief executive of the British Bankers' Association, said that a supertax on bonuses would send the wrong message to the world about the UK's position as a financial centre. "We have already seen quite a few companies shift out of the UK. It might be popular to put very high taxes on a few, but we need to know how we would look internationally," she added.
Ms Knight insisted: "The issue may well be one of human rights. In effect it says, if you earn a certain amount of money and work in something called a bank then you are likely to be taxed more than if you earn the same amount of money doing the same kind of activity in an organisation called an insurer."
Stuart Fraser, head of policy at the City of London Corporation, said the crackdown would be unworkable. "It's a bit like the transfer market in football," he said. "The talent will simply go."
Lord Myners, the City minister, attacked the RBS board over suggestions that it might resign en masse in the stand-off over bonuses.
He told peers: "The board of directors of RBS has apparently threatened to resign if they don't get the bonuses that they want, but I think that's rather a silly line for them to adopt and actually a very unpatriotic one and I think the nation finds that act indeed shameful."
Labour MPs and activists are urging the Chancellor to act against the bankers. Gavin Hayes, general secretary of the centre-left pressure group Compass, said: "We're glad the Government is now considering the sensible option of a windfall tax on bonuses – this is the right thing to do and proceeds should go to a green New Deal to create the new jobs we desperately need. Over the next few days it is crucial the Government does not cave into the City spin machine – let's have a pre-Budget report for the people, not the bankers."