The bank levy promised by George Osborne was today unveiled as draft legislation likely to mean £2.5 billion in extra tax for the coffers.
The levy will be a charge on the global balance sheets of British banks and on the British operations of banks from other countries.
The Treasury says the levy has been designed not only to raise money but also to 'encourage less risky funding'.
It replaces the one-off bank bonus tax imposed by Labour last year, which raised £3.5 billion.
The bank levy will be a permanent annual tax, with the rate announced later this year - but is likely to be around 0.25% of assets.The final legislation will be published before the end of the year.
Announcing the levy, financial secretary to the Treasury, Mark Hoban, said: "We have consulted on the design of the scheme so that it achieves two objectives: firstly, ensuring that banks make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy.
"Secondly, the final scheme design incentivises banks to make greater use of more stable financial sources, such as long term debt and equity, working with the grain of our wider reform programme."
The British Bankers' Association (BBA) says it accepts the levy, but has reservations about whether it can be applied fairly.
Angela Knight chief executive of the BBA, says: "The banking industry paid more than £26 billion in taxes last year and the bank levy will increase this figure. We will work with the Treasury to ensure the final levy also meets the aim of maintaining the UK's position as the world's financial centre while generating additional tax revenues.
"This bank levy applies not only to UK banks, but also to more than 200 overseas banks operating in this country. Questions are being raised about the UK proposing to apply tax to a global balance sheet. The Treasury's statement is largely silent on how this levy would interact with taxation in other countries.
"Until this is clearer, some banks could be taxed multiple times by multiple jurisdictions on the same activities. There is also no international consensus on how banking activities should be taxed: the G20 members still hold very different views."
Several major British banks including Standard Chartered and HSBC make most of their profits overseas and could be prompted to review their locations.
The Treasury also re-iterated that the government is still looking at bank bonuses. The Independent Commission on Banking is looking at this and the government will also consult on a remuneration disclosure scheme and working with international partners will explore the costs and benefits of a Financial Activities Tax on profits and remuneration.
The government has also asked the Financial Services Authority as part of its review of its Remuneration Code to consider imposing more stringent requirements on the deferral and award of variable pay; examining mechanisms for strengthening the link between performance and remuneration to ensure that incentives are aligned with the long-term performance of the firm; and consider how to vary capital requirements to offset risk in remuneration practises.
Nic Clarke, analyst at Charles Stanley, believes the levy could have been much worse. "This announcement was largely as expected (little impact on UK banks' share prices). It is our feeling that after extensive lobbying the banks are reasonably happy with the outcome," he says.
But he echoed the BBA's views on levy's threat to competitiveness: "The levy is based on a proposal by the IMF, but unless it is adopted (or something similar) by the key international financial centres then it is possible that the UK financial centre could be disadvantaged over time."