Taxpayers were hit for at least another £28.7 billion today as two state-backed lenders unveiled break-up plans on a seismic day for the UK banking sector.

Royal Bank of Scotland and Lloyds Banking Group will have to shed more than 900 branches to ease European competition concerns over the vast state support given to them in the past year.

The disposals – which could take up to four years – will put around 10% of the UK retail banking market up for grabs for smaller players or new entrants (see today's Customers 'to get choice' after sell-off MSE News story for impact on consumers).

The banks' £39 billion lending commitments to homeowners and businesses remain unchanged while they have had to agree to new rules on staff bonuses to secure the extra billions being pumped in.

Taxpayers have already paid out £37 billion for shares in the two banks since the crisis began, although Lloyds paid back more than £2 billion in the summer.

RBS, which will also have to sell its Churchill and Direct Line insurance arms, as well as parts of its investment banking business, is putting £282 billion in toxic debts into a taxpayer-backed insurance scheme.

The Government is pumping an extra £25.5 billion into the bank under the plans – with a further £8 billion ready if needed – taking its stake to 84%. RBS will also be able to claim tax write-offs on its losses worth a potential £10 billion.

Lloyds is paying £2.5 billion to avoid the scheme but the Treasury is shelling out £5.7 billion to support a record £13.5 billion rights issue launched by the bank, which will remain 43% state-owned.

The bank has been able to raise the funds due to a "stabilising" UK economy but has 2.8 million private shareholders who will not receive dividends for at least two years.

Chancellor Alistair Darling says the plans would increase competition and represented a "better deal" for the taxpayer.

The taxpayer's potential exposure has been cut by more than £300 billion mainly due to Lloyds pulling out of the Asset Protection Scheme (APS).

But Shadow Chancellor George Osborne says: "There is still no guarantee that today's plan will get credit flowing in the economy."

The pair will not pay discretionary cash bonuses to any staff earning above £39,000 for 2009 – although deferred shared bonuses will still be paid.

Lloyds chief executive Eric Daniels said: "Rewards have to be taken over the same sort of timeline as the period of risk."

Unlike Lloyds, RBS boasts a significant investment banking business where huge payouts have long been the norm.

Chief executive Stephen Hester said the bonus restriction was "one of the additional obstacles that makes our job of recovering money for the taxpayer more difficult... although I completely understand the rationale for it".

The union Unite warned up to 25,000 jobs were at risk because of the Government's plan to sell off parts of the banks – and called on ministers to save jobs rather than securing the best price for the banks' assets.

Meanwhile, the taxpayer is already around £10 billion down on its current stakes in the banks. RBS shares tumbled 10% today although Lloyds edged higher on news that its bad debt issues were easing.

Hargreaves Lansdown equities analyst Keith Bowman says the sell-offs are potentially good news for UK consumers although "the story of the banks is far from over".

"Suggested disposals have now to find buyers prepared to pay acceptable prices to both shareholders and taxpayers, whilst taxpayers still remain substantial owners of banks - a position inconceivable just a few years ago," he adds.

Further reading/key links

Top accounts: Best Bank Accounts
Reclaim cash: Bank Charges