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Overdraft fees will be capped under Labour saving millions of debt-hit bank customers £86 a year, Shadow Chancellor John McDonnell is set to announce.

The frontbencher unveils plans, welcomed by Hollywood star Michael Sheen, to ease the pain of hard-up people mired in short-term debt by extending a payday lending cap to also cover overdraft borrowing costs.

It would require the industry regulator to impose a limit of £24 per month per £100 borrowed on any interest, fees and charges related to a borrower’s overdraft.

Labour estimates 2.7 million people who are trapped in permanent overdrafts and using them over 85% of the time will benefit, saving a combined £233million year - about £86 each.

(Image: PA)

Unveiling the policy, Mr McDonnell will say: “The Tories’ rigged economy has seen real wages fall and insecure work multiply, whilst they handout huge tax giveaways to the super-rich and the banks.

“Too many families are having to rely on borrowing just to get to the end of the month, and are facing huge costs from our high-street banks.

“The national scandal of the low-paid debt trap has to end. More needs to be done to level the playing field and bring greater fairness in consumer finance.

“Labour will end the misery of permanent debt and extend the cap on borrowing charges to overdrafts.”

Campaigners have warned of “persistent overdrafts” where high fees and low wages prevent families ever dragging themselves fully back into credit.

Research suggests overdraft charges can be up to four times higher than borrowing from payday lending.

And other surveys show nearly three million people have to rely on overdrafts to fund essentials like food and household bills.

The existing payday lending cap allows a maximum daily interest charge of 0.8% of the amount borrowed – equivalent to £24 per month per £100 loaned.

(Image: Getty Images Europe)

It also limits total costs at 100% so that no borrower using payday loans will ever pay back more in interest than they have initially borrowed.

Welsh actor Michael Sheen, founder of the End High Cost Credit Alliance, said: “High cost credit is more than just payday loans, rent-to-own businesses or doorstep lending.

“Millions of people across the UK are also trapped in their overdrafts by extortionate rates of interest charged by reputable high street banks.

“As founder of the End High Cost Credit Alliance I want to see a future financial landscape that takes all of this into account and keeps us moving in the direction of an ever increasing fairness.

“Right now there are at least 2.7 million people who urgently need our help in delivering a fairer system.”

(Image: PA)

Campaigners welcomed the announcement as an “important step towards ending the debt crisis that many low income households are now facing”.

Centre for Responsible Credit director Damon Gibbons said: “Too many families have become trapped by a failing model of financial services provision which sees banks and other financial institutions making often significant profits out of people stuck with permanent, high-cost debts.

“It’s time for a fresh approach, with better regulation of our financial institutions in the interests of households and consumers.”