Deal allows US bankers to escape non-dom levy

Chancellor Alistair Darling will try to repair his damaged relations with the City by watering down plans to hit American bankers and businessmen with a £30,000-a-year levy.

In a move seen by critics as yet another U-turn, Mr Darling will also announce on Wednesday that non-doms who commute to Britain will not be liable to pay the £30,000. He has also backtracked on plans to toughen up rules on how long they can stay before being liable.

Thousands of Americans working in the City and Canary Wharf feared that the proposed new charge on nondomiciles living in Britain would make them liable for tax by the US authorities too.

Senior Treasury sources told the Evening Standard that Mr Darling will make clear that he is confident of a deal with American authorities to prevent "double taxation". The US Treasury cannot publicly approve the deal until later this week, but it has signalled that it will allowthe non-dom levy to be offset against US tax.

The CBI today warned again that Britain had an "increasingly uncompetitive" tax system and called for corporation tax to be slashed from 28p to 18p over the next eight years.

Mr Darling has come under heavy attack since he unveiled the non-dom tax last October. Critics claim Gordon Brown is to blame because he was planning a snap general election and ordered his Chancellor to come up with a plan to rival similar Tory proposals.

Mr Darling will still stick to his overall plan for a £30,000 a year charge on foreigners who are not domiciled here for tax purposes. But more than nine in 10 non-doms will not have to pay as it will only apply to those who have lived here for seven years - most go home after five .

The Chancellor also upset many in the City by suggesting strict new rules affecting tax exiles who commute into Britain. People who are deemed to have spent an average of 90 days a year in Britain are liable for UK tax and Mr Darling said days spent travelling into and out of the country should also be counted. After protests, the Treasury will now only count overnight stays.

It emerged this weekend that Tony Blair had repeatedly killed off the idea of a non-dom tax.

The Business Secretary and leading Blairite John Hutton today appeared to be at odds with the crackdown on the wealthy. In a speech to the Progress think tank, he will declare that Labour should celebrate "huge salaries in Britain" not question their morality. He will urge his party to celebrate entrepreneurs, including City traders: "aspiration and ambition are natural human emotions".

The Chancellor is also expected to:

Unveil a deal with energy firms to cut bills for the over-70s by £50 a year.

Use his powers to prevent pay-asyougo gas and electricity customers being unfairly treated by energy companies;

Change tax credits to help tackle child poverty.

Raise duties on alcohol, ending the 10-year freeze on spirits duty.

Cut his growth projections and raise borrowing.

The Prime Minister today told the Financial Times that the Budget would show that he was not backing away from radical reform of public services. "There can be no back-tracking on reform, no go-slow, no reversals and now easy compromises," he said.