The European Commission has suggested laws to close tax loopholes and harmonise taxes on interest earned across Europe. Most EU countries already have such a 'savings tax', but many savers move their money into countries like Luxembourg to avoid paying taxes.

The Commission has suggested to introduce a europe-wide savings tax of at least 20% of profits from bank accounts and investments.

Hundreds of millions of pounds of business at stake

The City is concerned that could lead to tax evaders taking their money out of Europe.

The Commission's plans will be outlined to finance ministers on Friday evening in Luxembourg where Britain's Chancellor of the Exchequer, Gordon Brown, is expected to say it would be unworkable.

European fairness

Investors in Britain have long been used to paying tax on the interest payments they receive from their savings without really noticing it. The tax is withheld automatically.

But under the current system savers can avoid paying these taxes by placing their money with financial institutions in places like Luxembourg, Jersey, the Irish Republic or outside the EU.

But the European Commission is worried that avoiding tax by placing it in a neighbouring EU country is not in the spirit of European fairness.

There is a feeling that there should be a uniform 20% tax on savings right across the EU.

But with UK investors already used to being taxed on their savings, why should they be worried?

John Whiting: Impact on financial markets

John Whiting, a tax partner in Price Waterhouse explained: "There are a few people who might just worry. The few people who might not be telling the taxman about the interest they are getting from Germany or somewhere else, when of course they should do.

"The bigger worry is whether it really affects the financial market, the bigger scene.

"Whether it effects companies' ability to raise money on things like the Euro bond market.

"Whether it means that foreign investors from outside the EU will now go and put their money into Jersey or to the US."

City anxious

It is that potential flight of capital that has got some people in the financial markets rattled.

London is thought to account for half of all business in Euro bonds.

The new taxation rules would mean that for the first time interest payments on those bonds would be subject to tax before being paid out to investors.

It is feared that could drive business away to the tax havens outside the EU.

Stephen Lewis, chief economist at Monument Derivatives said: "If it goes ahead with the type of 20% plus tax rate which the EU Commission is proposing then it could be a serious threat to London.

"It would give a strong enough incentive for business to move to other parts of the world which were exempt from the withholding tax.

"If the rate is lower than that then the incentive would be less and London's other competitive advantages would probably ensure that the business would stay here."

While many individual investors can sleep easy for now, the tax rules that the commission is considering could pose a big threat to business in the City.

Judith Mayhew: "The government should veto Euro tax"

Judith Mayhew of the Corporation of London said: "We are lobbying hard together with all the financial institutions in the city to ensure that we will not agree to these proposals as they stand.

"We also know that internationally agreements might come through the Organisation for Economic Co-operation and Development (OECD).

"If that happens, fine, but until that happens, until we have a level playing field, we would hope our government would veto this."