Chancellor John Healey unveiled a fresh tax levy on Britain's banks in his first Budget on Tuesday.

The measure is designed to fund a short-term cost-of-living package, including a £100 energy-bill payment for 20 million families in January.

Healey said banks earning more than £100 million in profit will pay an additional 3% on the current "Bank Surcharge".

Since the surcharge already sits at 3%, the new rate will rise to 6%, lower than the 8% banks had feared.

While intended to support households, experts warn the tax could also affect consumers' wallets.

Mortgage costs could rise

Financial analysts predict lenders may shift the tax burden onto borrowers, pushing mortgage payments higher.

Up to 700,000 households with fixed-rate deals ending this year could see annual bills increase by as much as £5,000.

The average five-year fixed rate reached 6% in early October, the highest level in three years.

Dan Coatsworth, head of markets at AJ Bell, cautioned that borrowers on variable rates may feel the greatest impact if banks pass the tax on.

"Remortgagers and those in the market for a new deal are already suffering horribly as Bank of England rate rises are priced into fixed rate deals," he said.
"The mortgage market tends to be more competitive than the savings market, so it will be harder for lenders to squeeze much more out of borrowers, but it won't stop some of them trying.
"You could find this reflected in the standard variable rate, because the banks know people on these rates are already putting up with uncompetitive deals, so it's much easier to extract even more cash from them."

Shadow Chancellor Andrew Griffith also warned the levy could lift mortgage-holder costs.

The Bank of England kept its base rate at 3.75% last month, though future hikes remain possible if inflation and energy prices stay high.

Free cash-back offers may disappear

High-street banks currently provide free cash incentives worth hundreds of pounds to lure new customers, such as Lloyds Bank's £200 cashback for opening a Club Lloyds account.

Experts say banks might scrap these promotions to recoup revenue lost to the tax.

Sarah Coles, head of personal finance at AJ Bell, said cuts in bank-switching bonuses "could be one of the things we can see" after the Budget announcement.

Savers could face lower rates

Higher Bank of England rates typically boost savings returns, but the tax hike may cause banks to delay passing rate rises to savers or keep rates unchanged.

Dan Coatsworth warned the levy "could mean banks are slower to pass rate rises on to savers - and some may choose not to raise rates at all when the Bank of England does, so they can sit on the extra profit."
He added that with inflation expected to stay high, "more banks offering less than inflation, so the spending power of your savings is gradually eroded."

He urged savers to compare high-street offers with online banks and cash-savings platforms.

Account fees may increase

Banks might also raise monthly account charges or alter perk rules to offset the new tax.

Many high-street accounts already charge fees for benefits such as insurance or freebies.

Dan Coatsworth said, "Banks aren't going to take new taxes lying down, so some of the extra cost is bound to be passed onto customers."
"Some of this will be the things we can see, like account charges, but most of it will be baked into the rates on offer."