UPDATE 2-UK banks face higher tax bill despite profit surcharge cut

* Banks call for continued review of sector tax

* Overall tax burden on banks to rise from 2023

* Many challenger banks to escape surcharge (Adds more detail, reaction)

By Huw Jones

LONDON, Oct 27 (Reuters) - Britain will lower its surcharge on banking profits from April 2023, the finance ministry said on Wednesday, as the government seeks to shore up London's competitiveness as a global financial centre after Brexit.

British Finance Minister Rishi Sunak said in his budget statement that the current 8% surcharge on profits over 25 million pounds at banks will be cut to 3% from April 2023, softening the impact of a rise in UK corporation tax on that date to 25% from 19%.

"The overall rate of corporation tax on banks will in 2023 increase from 27% to 28%, and will remain higher than the rates paid by other companies," Sunak told parliament.

Britain is looking for ways to maintain London's role as a global financial centre after being largely cut off from the European Union since Brexit.

The surcharge has raised 8.3 billion pounds since its implementation in 2016 and without the cut to 3%, UK lenders' overall tax bill would put them at a disadvantage to their international peers.

"Small challenger banks are improving banking competition which is good for the sector and good for consumers, so to help them I will also raise the annual allowance to 100 million pounds," Sunak said in reference to the current 25 million pound threshold.

UK Finance, which represents banks in Britain, welcomed the surcharge cut while noting that banks will continue to be taxed at a higher rate than other companies.

"Given the overall tax position of other global financial centres, we urge HM Treasury to keep the banking and finance sector's total tax rate under active review," UK Finance CEO David Postings said.

Due to the changes announced on Wednesday, some 35 banking groups will fall out of surcharge's scope in 2023, leaving about 35 of the largest banking groups subject to it, the finance ministry said.

Britain will retain a separate levy on banks' balance sheet liabilities, which has raised 25.5 billion pounds so far, along with a ban on tax relief for historic losses incurred during the financial crisis, which has raised 3.5 billion pounds.

(Reporting by Huw Jones, Editing by Hugh Lawson, Mark Porter, Kirsten Donovan)