Future recipients of Britain’s highest awards for military and civilian bravery, the Victoria Cross and the George Cross, will receive an annual payment of £10,000 from the state, which will be funded from fines levied on banks.

The funding is expected to be part of a larger package of donations to military causes from bank fines, building on the £450m for good causes announced using banking fines over the past five years.

The Treasury said the funding continued George Osborne’s drive “to ensure that fines from those who demonstrated the very worst of values are used to support those in our armed forces, emergency services, veterans and other causes who demonstrate the very best of British values.”

Osborne, who is expected to refer to the announcement in the budget on Wednesday, met some of the recipients of the award on Tuesday in Downing Street.

The annual, tax-free award will be met by using £3m in penalties levied by the Financial Conduct Authority, the body responsible for regulating the financial services.

The awards, bound to burnish Osborne’s credentials with the armed forces, comes as the defence establishment continue to battle with the Treasury to win agreement that the defence budget will remain at 2% of GDP, the minimum demanded by Nato.

The VC and GC are the two highest honours in the UK. The VC is awarded – often posthumously – to members of the armed forces from across the Commonwealth and previous British Empire territories for valour. The GC is the highest gallantry award for civilians, created by King George VI in 1940 to award civilians who demonstrated bravery and courage in the face of the Blitz.

There are 10 living holders of the VC and 20 living holders of the GC (including the Island of Malta GC and the Royal Ulster Constabulary GC, both awarded on a collective basis).