Taxpayer-backed lender Royal Bank of Scotland is pulling out from a government plan that insured its assets, passing a key milestone in its journey towards freedom from state control.

RBS has paid the minimum required premiums of 2.5 billion pounds ($4 billion) since joining the UK Government's Asset Protection Scheme (APS) in 2009, which formed part of its state rescue.

It will withdraw from the scheme as the protection is not needed, it said on Wednesday, saving itself 800 million pounds a year in further fees.

The news was widely expected, but welcome. RBS shares were up 2.2 percent by 3.28 a.m. EDT, one of the strongest European bank shares.

"Having entered the APS in November 2009, this news should be viewed as RBS's ongoing financial rehabilitation," said Vivek Raja, analyst at Oriel Securities.

The specially designed insurance scheme capped potential losses on 282 billion pounds of RBS's most toxic assets after its bailout in 2008, which has left the taxpayer owning 83 percent of the bank.

"The Government's strategy remains to return RBS to the private sector when it is value for the taxpayer to do so. Today is a step in that direction," said finance minister George Osborne.

He said the closure of the APS meant that during the current term of Parliament taxpayer support to the banking sector in the form of guarantees had fallen by more than 450 billion pounds, a drop of almost 95 percent.

RBS said it had paid the required premiums and reduced 63 percent of the assets covered by the scheme to around 105 billion pounds and said it was "highly unlikely" that the insurance would ever be needed.

Britain's Financial Services Authority has approved RBS's withdrawal from the scheme on Thursday but the bank will continue to discuss its capital plans and preparations to meet Basel III demands with the regulator.

RBS has also paid around 1.5 billion pounds to the UK Treasury for liquidity support. ($1 = 0.6211 British pounds)

(Reporting by Sinead Cruise and Steve Slater; Editing by Raji Menon and Hans-Juergen Peters)