BRITISH soldiers and civil servants working in Cyprus who face losing part of their bank savings because of the proposed £9 billion EU bailout levy will be compensated by the UK taxpayer, Chancellor George Osborne has promised.

However, thousands of expatriates are likely to lose a significant part of their savings deposited with local banks on the Mediterranean island.

European officials have warned that people with less than £87,000 in their accounts will have to pay a one-off tax of 6.75%; those with more money will lose 9.9%.

It is estimated the tax could affect many of the 3000 UK military personnel and 150 civil servants on the island as well as a large number of the 59,000 British residents there and who have £1.7bn in Cypriot banks.

Mr Osborne yesterday sought to reassure state employees, saying: "For people serving in our military, for people serving our Government out in Cyprus – because we have military bases there – we are going to compensate anyone who is affected by this bank tax. People who are doing their duty for our country in Cyprus will be protected from this Cypriot bank tax."

The Chancellor was also keen to stress Cypriot banks in Britain, with whom many thousands of Britons bank, would not be affected by the EU bailout levy.

William Hague, the Foreign Secretary, admitted the compensation cost to the Exchequer was not yet known, but a statement would be issued later this week.

He said: "Where people have no choice but to be in Cyprus – that is the case for the military serving in sovereign-based areas – we do have to look after those people."

Kevan Jones, Labour's Shadow Armed Forces Minister, said the Coalition's response seemed rushed and would cause uncertainty for service personnel. He added: "Ministers must tell us how this compensation scheme will work and when our forces will receive reimbursements."

Cyprus is the fifth country to have asked for eurozone help, but this is the first time a deal has involved savers being forced to give some of their money.

The EU bailout, agreed on Friday, also calls for a 2.5 percentage point increase in corporation tax and a bank restructuring.

Cypriot President Nicos Anastasiades admitted the deal was painful but necessary to avoid a disorderly bankruptcy.

An emergency meeting of the Cypriot parliament, due to take place yesterday, has been postponed until today amid growing public alarm.

Sharon Bowles, chairwoman of the European Parliament's Economic and Monetary Affairs Committee, said she was appalled by the plans. The MEP for south-east England said: "This grabbing of ordinary depositors' money is billed as a tax, so as to try to circumvent the EU's deposit guarantee laws. It robs smaller investors of the protection they were promised."

Mr Hague added: "This is what happens if a country can't pay its way and Cyprus is in a position where it can't pay its way."