British Prime Minister David Cameron said on Wednesday he would block any proposal to increase the overall pay and bonus bill at state-owned Royal Bank of Scotland.
The opposition Labour party has called on the government to oppose any plan by RBS to pay top staff bonuses worth twice their salaries.
Cameron told parliament the government would veto "any proposals to increase the overall pay, that is the pay and bonus bill at RBS, at the investment bank".
Labour argued that the government should not allow the heavily loss-making bank to seek shareholder approval to bypass the bonus cap imposed by the European Union at a time when ordinary families face a cost-of-living crisis.
The showdown will hamper efforts by its new boss Ross McEwan to steer calmly through the bonus season. McEwan waived his annual payout following public anger over the pay of his predecessor Stephen Hester.
RBS, 81pc owned by the state, had been expected to join rivals, such as Barclays and HSBC, in seeking shareholder approval to pay bonuses twice the size of salaries. The EU bonus cap allows banks to double bonuses if they win shareholder backing.
Cameron did not say specifically that the government would veto such a request.
Britain's finance minister George Osborne and many banks in London oppose the curbs, arguing it will force up fixed salaries and could drive important staff to rival institutions not bound by the rules.
Labour's Chris Leslie, shadow financial secretary to the Treasury, said that the government, as majority shareholder, should reject any request from RBS to increase payouts.
"At a time when families face a cost-of-living crisis and bank lending to business is falling, it cannot be right for George Osborne to approve a doubling of the bank bonus cap," he said in a statement.
Labour's proposal is part of a renewed focus on bank reform. Its leader Ed Miliband is expected to unveil proposals to force Britain's biggest banks to sell branches in a keynote speech on Friday.
RBS, rescued by a £45bn (€54bn) government bailout during the 2008 financial crisis, said that no decisions had yet been taken on pay and conversations were continuing with its shareholders. The Treasury declined to comment.
McEwan's efforts to rejuvenate the bank have already been hampered by accusations over its treatment of small businesses, technology problems which affected millions of customers, and an investigation into the possible manipulation of foreign exchange rates.
RBS has shrunk its investment bank since 2008, meaning it has fewer staff than competitors who could be in line for big bonuses. However, it still paid out more than $600m in bonuses last year, including payouts of more than a million pounds to 93 employees.
The bank had 368 so-called 'code staff', or those in risk-taking positions, in 2012, earning an average of £700,000. Their bonus was on average 1.3 times their fixed pay.
RBS made a pretax loss of £634m in the third quarter, although that was down from a £1.4bn loss a year ago.