The government surprised banks earlier this month by announcing a new 8 percent surcharge on profits from January, sending shares in new banks like Aldemore (>> Aldermore Group PLC), Virgin Money (>> Virgin Money Holdings (UK) PLC) and Shawbrook (>> Shawbrook Group PLC) tumbling.

A levy on the balance sheets of large banks like HSBC (>> HSBC Holdings plc) would, however, be slashed and the basic corporate tax rate for all lenders cut as well.

The British Bankers' Association (BBA) has said the surcharge will hinder new entrants and contradict the government's policy of seeking stronger competition.

But Harriett Baldwin, Britain's financial services minister, said the tax and levy changes set out a "sustainable, fair and competitive long-term plan" for the sector.

"These changes will leave all our banks, including challenger banks and building societies, with a rate of corporation tax lower than in every other G7 country," Baldwin told a CityUK lobby group event.

She said it was important to keep encouraging new banks to enter the market, and Britain's two financial regulators, the Prudential Regulation Authority and the Financial Conduct Authority, will set up a "new bank unit".

The unit would help new, prospective banks to enter the market and support them through the early days of full authorisation, she said.

The FCA and UK Treasury declined to elaborate, saying more details would be announced later in the year.

Regulators have already speeded up authorisation of new banks and their CEOs, and eased initial capital requirements, with 14 new lenders authorised in the past two years and another 20 in the pipeline.

After setting out a long-term tax plan for banks, the sector can now move to a "new level" by focusing on becoming more competitive, helped by the decision to make this a new remit for regulators, Baldwin said.

The cut in bank levy comes after HSBC, which pays a large chunk of it, said it was reviewing whether to keep its head office in London.

(Reporting by Huw Jones; Editing by Mark Trevelyan)

By Huw Jones