British banks are bracing for a potential tax hit to their profits as the government seeks out new sources of cash to support budgets and shore up its finances.

A source familiar with the British government's plans said new finance minister Jeremy Hunt was reviewing the current surcharge on bank profits and would confirm the level when he delivers his medium-term fiscal plan on Oct 31.

Britain already imposes a levy on bank balance sheets and an 8% surcharge on profits above the 19% rate of corporation tax, although this surcharge was set to reduce to 3% next year.

Hunt has not yet decided whether to scrap the proposed cut to the bank surcharge, the Financial Times reported on Tuesday, fuelling investor concerns about the potential tax burden on lenders.

Shares in British lenders fell as much as 6% in early trading on Wednesday following the report.

Shares in Lloyds and NatWest fell as much as 4% and 5% respectively, while challenger Virgin Money slid 6%. The stocks later pared some of their losses but were still underperforming the wider FTSE index.

Governments across Europe have been weighing whether to slap new taxes on banks to help pay for state support packages for citizens struggling with soaring food and fuel prices, with both Spain and Hungary proposing one-off levies.

Lenders are expected to post bumper profits in the short term on the back of higher interest rates. Savers, meanwhile, are still yet to reap the same benefits and many borrowers are grappling with the rising costs of mortgages, credit cards and loans.

Senior bankers in Britain had been wary of the potential for extra taxes, although one senior industry source said they had had no dialogue so far with Hunt's new team.

"We urge the government to consider the surcharge very carefully and not put at risk the competitiveness of the UK's banking and finance industry," a spokesperson for bank lobby group UK Finance said. (Reporting by Iain Withers, editing by Sinead Cruise, Kirsten Donovan)