British government and military personnel in Cyprus will be protected from any levy on their bank deposits as part of an EU bailout.
Foreign Secretary William Hague told Sky News that Britain had been "separated" from contributing towards the 10bn euro (£8.6bn) bailout, adding that 3,000 Britons in the country would not suffer in the proposed raid on bank savings.
Cyprus had been due to vote on the levy later on Sunday but it has pushed back the vote until Monday. Meanwhile, last minute talks were going on to try to to soften the impact on smaller savers.
Under the terms of the bailout by the Eurozone, savers in Cyprus could have to pay a one-off tax on their bank deposits.
The originally proposed levies on deposits are 9.9% for those exceeding 100,000 euros (£85,454) and 6.7% on anything below that.
But the Cypriot government was on Sunday evening discussing with lenders the possibility of changing the levy to 3% for deposits below 100,000 euros, and to 12.5% for above that sum, a source close to the consultations told Reuters.
Addressing the country, Cypriot President President Nicos Anastasiades described the situation as the worst crisis his nation has faced since the Turkish invasion of 1974.
Mr Anastasiades said: "The solution we concluded is not what we wanted, but is the least painful under the circumstances."
He said he had to accept a painful compromise on the tax in return for international aid or else the island would have faced bankruptcy.
But the UK will largely be protected according to Mr Hague, who told Sky: "The UK no longer has to pay into eurozone bailouts so we are not putting money directly into the banks - that’s because David Cameron negotiated a change in what the last Labour government left us liable for.
"We have separated Britain from having to take part in those bailouts however where people have no choice but to be in Cyprus - that is the case with our military serving in the sovereign base areas, we do need to look after those people … But the expenditure involved would be nothing comparable to the bank bailout as a whole."
But there are tens of thousands more British residents in the country - including many pensioners - who do not fall into that category and will end up out of pocket.
The one-off levy has sparked anger in the eastern Mediterranean island, with queues at cash machines battling to withdraw their money.
Electronic transfers were blocked and the country's cooperative banks had to shut their doors after seeing a rush of savers keen to protect their money.
Christos Demetriades, 58, who was outside a shut Nicosia co-operative bank branch, said: "Politicians and senior bank bosses have covered each other's backs for years, now it's ordinary people who are paying the price and are being punished."
One disgruntled customer at a branch in the southern coastal town of Limassol briefly parked his tractor in front of its shut doors in a show of frustration.
The move marks the first time the 17 eurozone countries and the IMF have dipped into people's savings to finance a bailout.
An informal meeting on Sunday morning for parties in the 56-member chamber to discuss the bank levy was also postponed by newly-elected Cypriot President Mr Anastasiades.
He has said refusing the bailout would lead to the collapse of the island's two largest banks, badly burnt by their exposure to bailed out neighbour Greece.
The tax on deposits in Cyprus, which accounts for only 0.2% of the eurozone's economy, is expected to raise up to 6bn euros (£5bn).
Those affected will include rich Russians with deposits in Cyprus and Europeans who have retired to the island as well as Cypriots themselves.
The size of foreign deposits in Cyprus - estimated at 37% of the total - was one reason the eurozone agreed to the tax on savings, to take effect when banks reopen on Tuesday.
It will apply to all deposits held in banks within Cyprus, including an estimated 2bn euros (£1.75bn) of British money, according to the European Central Bank.
It will not affect deposits held in the UK branches of Cypriot banks, such as Bank of Cyprus, whose UK subsidiary is regulated by the Financial Services Authority.
However, Laiki Bank UK said on its website: "Your eligible deposits with Laiki Bank UK are protected up to a total of 100,000 euro (£87.000) by the Cyprus Deposit Protection Scheme and are not protected by the UK Financial Services Compensation Scheme.
"Any deposits you hold above the 100,000 euro limit are not covered."
Cyprus was badly hit by the Greek financial crisis because of its close links to the country.
Its two largest banks saw combined losses of 4.5bn euros (£3.8bn) - equal to a quarter of the island's gross domestic product.
The rescue package was agreed after 10 hours of talks in Brussels and was significantly less than the 17bn euros (£14.7bn) asked for.
As part of the deal, the government will also have to hike corporate tax to 12.5% from 10% and sell off state assets to help balance the public finances.