Alliance & Leicester has unveiled it is abolishing interest charges on overdrafts and replacing it with a fee structure where customers will pay a simple 'overdraft usage' fee of 50p a day, capped at a maximum of £5 per month. There will be no fee for arranging the facility, and it will only apply when the overdraft is used. So you could be overdrawn for a year for a total charge of £60.

For those Alliance and Leicester customers who exceed their authorised overdraft limit or go overdrawn without an overdraft there will be a new £5 a day charge. The bank argues that if customers slip over the agreed limit for a few days it is much easier to work out the cost.

Andy Bayes, head of current accounts for Alliance and Leicester, said: 'Alliance and Leicester is the first UK bank to abolish overdraft interest for all its customers and is committed to offering free banking for customers who stay in credit.

"The changes we are making mean that customers using their agreed overdraft will never pay more than £5 a month ... and many will pay less.

"Research that we carried out earlier this year made it clear what customers want. They are in favour of banking continuing to be free, and the vast majority think that if banking is free, then it's fair to pay when going overdrawn.

'However, there is a lot of confusion when it comes to overdrafts. Nearly two out of three people with an overdraft facility admit that they don't know the rates that apply to their overdraft – and those who are aware massively underestimate them. Two thirds of people with a view think interest on overdrafts is complicated to work out and replacing this with a simple daily fee for going overdrawn would make it easier for them to manage their money.'

The Alliance & Leicester's charge for agreeing to pay a cheque, direct debit, or standing order while overdrawn without permission will stay at £25.

But the charge for refusing to make the payment while in the red - bouncing a cheque - will be reduced to £25 from the existing £34.

The changes to charging for overdrafts have been announced amid growing controversy over bank charges. Over the past year thousands of customers have reclaimed these charges, and both the Financial Ombudsman Services and courts have been deluged with complaints. In most cases the banks have not defended these complaints, resulting in charges being refunded in full.

But all cases are now on hold, pending a test case brought by the Office of Fair Trading and some larger banks.