Chancellor George Osborne today hit the banks with a surprise £800 million tax raid as he announced the Government's new bank levy was to be made permanent.
The unexpected move - unveiled by Mr Osborne on the BBC Radio 4 Today programme - was greeted with shock and anger by the banks, with some bank chiefs reported to be "livid".
The British Bankers' Association (BBA) accused the Chancellor of "changing the tax goalposts" and warned it would make the UK a less attractive place for businesses to operate.
The increase was dismissed by shadow chancellor Ed Balls as a "damp squib" intended to deflect attention away from the Government's failure to secure a wider agreement with the banks on bonuses and business lending.
However Mr Osborne insisted he expected to make an announcement "in the next week" on the Government's so-called Project Merlin talks with the banks, following months of sparring between the two sides.
He said the announcement on the bank levy should pave the way for a deal to curb bonus pay-outs while increasing lending to cash-starved small and medium-sized firms.
"It's very important to get all the components in place. Today's announcement clears the way so now banks know where they are on taxation," he said.
"I'm still confident we can secure a deal with the banks on seeing an increase in lending to small businesses and see that bonuses are lower this year than last year."
The BBA however criticised the Treasury for making last-minute adjustments to the levy which was announced in last year's Budget.
"The levy itself is complex and will hit our most global banks hardest as they operate and pay tax across national boundaries," it said in a statement.
"Changing the tax goalposts also makes things harder - all organisations want a predictable tax regime so they can plan their businesses accordingly and constant chopping and changing risks making the UK a less attractive place for businesses to operate."
Mr Osborne said he was scrapping the lower introductory rate originally planned for 2011 as the banking sector is returning to health faster than expected.
The Treasury had planned to phase the levy in, with banks paying a lower introductory rate on their balance sheets since the start of the year.
But the tax will be increased in March and April to offset this before settling at 0.075% a month.
The tax, which was introduced on January 1, will now raise the full £2.5 billion target in 2011 and 2012 before rising to £2.6 billion for the following years.
Treasury officials acknowledged the decision to raise the bank levy had not been part of the Project Merlin talks.
"It is not surprising that they would have been surprised," one official said.
Officials said the announcement had been timed to ensure ministers did not lay themselves open to charges of acting in "bad faith" by making the move after a deal was in place.
They now hoped to complete the negotiations within a seven-day "deadline".
The announcement comes ahead of what is expected to be another bumper annual results season for the sector, with UK banks expected to report combined profits of £24 billion for 2010.
Bosses at some of the biggest banks are said to be in line for multimillion-pound windfalls.
Mr Balls said the Chancellor now appeared to be panicking over his failure to get an agreement.
"This panicky announcement seems to be a fig leaf to hide George Osborne's failure to get a deal on the Project Merlin talks with the banks," he said.
"We will have to keep waiting for an announcement on the Project Merlin talks before we can judge whether George Osborne has delivered. Until then, people will rightly conclude that so far George Osborne has been all talk and no action."
TUC general secretary Brendan Barber said the levy was still "pathetically small", amounting to little more than "small change" from the banks' bonus pools.
"Rather than set alarm bells ringing in the City, this levy will be met with the sound of clinking champagne glasses," he said.
Mr Balls and Mr Osborne later went head-to-head in the Commons for the first time since the appointment of Mr Balls as shadow chancellor.
He accused Mr Osborne of having no "plan B" to deal with a new economic downturn while the Chancellor hit back denouncing Mr Balls as a "deficit denier".Reuse content