Osborne said he would change rules which enable banks to offset losses from the financial crisis of 2007 to 2009 against tax on profits for years to come, which had meant some banks wouldn't be paying tax for 15 or 20 years.

"The banks got public support in the crisis and they should now support the public in the recovery. I am limiting the amount of profit in established banks that can be offset by losses carried forward to 50 percent and delaying relief on bad debts," Osborne said.

The move, which will also impact international banks with operations in Britain, was described as "unexpected and significant" by Jonathan Richards, a director at EY.

"It is likely to represent a significant additional cash tax cost for the banking sector over the next few years," he said.

Britain's biggest five banks: Lloyds Banking Group (>> Lloyds Banking Group PLC), HSBC (>> HSBC Holdings plc), Barclays (>> Barclays PLC), Royal Bank of Scotland (>> Royal Bank of Scotland Group plc) and Standard Chartered (>> Standard Chartered PLC), have more than 17 billion pounds of loans on their books on which tax is deferred, though some of that includes overseas assets subject to local tax rules.

In Britain, RBS had 2.4 billion pounds of deferred tax assets at the end of 2013, Barclays had 499 million, HSBC had 255 million and Standard Chartered 110 million. Lloyds did not give a separate UK figure but has 5 billion pounds of deferred tax assets in total, the majority of which are in Britain.

"Lloyds appears to be the most affected," said Investec analyst Ian Gordon.

The government also said it has asked Britain's financial regulator to consider asking banks to guarantee customers can switch lenders in five working days, quicker than the current seven day deadline. The move is part of measures to increase competition within the industry.

Shares in Lloyds were down 1.2 percent, Barclays were 0.6 percent lower, HSBC were down 0.4 percent and RBS were 0.1 percent lower at 1555 GMT. Standard Chartered were up 1.5 percent.

(Editing by David Holmes and Elaine Hardcastle)

By Matt Scuffham and Steve Slater