Osborne may be forced into charity tax U-turn

George Osborne may soften the blow to charities of his plan to cap tax relief on donations amid a growing backlash from philanthropists, Cabinet ministers and senior Tory MPs.

The Chancellor is under mounting pressure over his decision in last month's Budget announcement to bring in an annual cap of tax-free giving of £50,000, or 25 per cent of someone's income, from April next year.

Whitehall sources said Mr Osborne faced pressure from other ministers to phase in the change over two or three years to give charities time to prepare. Vince Cable, the Business Secretary, who is responsible for higher education, is said to be concerned that donations to universities will be hit, and Jeremy Hunt, the Culture Secretary, is worried about the possible impact on arts groups.

Danny Alexander, the Liberal Democrat Chief Treasury Secretary, backs the Chancellor's move to stop people using charitable gifts to avoid tax but wants to ensure the impact is fully discussed with charities in order to limit the damage to them.

Yesterday, David Cameron sought to lower the temperature by promising that he would "look very sympathetically" at the charities' concerns about losing big donations. He sparked speculation about a government retreat by adopting a markedly different tone to a Downing Street briefing 24 hours earlier, which suggested that wealthy donors were tax dodgers.

Speaking at a press conference during his visit to Indonesia, the Prime Minister said: "There's no doubt abuse is taking place. Some people have been using charities established in other countries to funnel money into those so they're not paying 50p tax or even 45p tax but in some cases are paying 10 or 20 per cent tax. I think that isn't right."

Mr Cameron said Mr Osborne and he were at one in wanting to achieve the goals of increasing charitable giving while making sure the tax system is not abused. "I am quite convinced we will be able to do that," he said.

Downing Street sources denied that Mr Cameron had signalled a climbdown, insisting he was repeating the position the Chancellor had set out.