Chancellor George Osborne sketched out the proposal in his comprehensive spending review statement yesterday (October 20th 2010), which detailed Â£81 billion ($127 billion) worth of cuts from public services in the UK that are scheduled to take place over the course of the next four years.
He said that it was important for the maximum tax revenues to be taken from British banks, with the public being asked to accept the tough measures that will see almost 500,000 jobs lost in the public sector.
Details of how the new banking tax will work have now been released, with the levy set to be based on the size of financial institutions' balance sheets, reports BBC News.
The final rate of the levy is yet to be confirmed, but banks have been told that it will not exceed 0.1 per cent.
Documents released in June on the proposals suggested that the levy would be introduced at 0.04 per cent initially, rising to 0.07 per cent after its first year of operation.
Certain items contained on balance sheets, such as bank capital and retail deposits covered by insurance, will be exempt from the tax.
Mark Hoban, financial secretary to the Treasury, said there are two key aims underlining the legislation.
"Firstly, ensuring that banks make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy," he stated.
"Secondly, the final scheme design incentivises banks to make greater use of more stable financial sources, such as long term debt and equity."
It is hoped that the tax will raise around Â£2.5 billion a year.
The Fitch ratings agency has said that the UK should be able to maintain its triple A credit rating as a result of the measures outlined by Mr Osborne yesterday.
By Tony Aynsley