The government will drop plans to cap tax relief on donations to charity, the Treasury has announced.
The department will proceed with a consultation on plans to limit other tax reliefs for wealthy individuals, but there will be no limit on donations to charity.
The proposed cap, announced by Chancellor George Osborne in this year’s Budget, would have limited the amount of tax a donor could reclaim to £50,000 or a quarter of their income, whichever was higher, from April 2013.
A statement today from Osborne said: "I can confirm that we will proceed next year with a cap on income tax reliefs for wealthy people, but we won't be capping relief for giving money to charity. It is clear from our conversations with charities that any kind of cap could damage donations, and as I said at the Budget that's not what we want at all. So we've listened."
Figures produced by the Charities Aid Foundation had suggested that the cost to the charity sector could be as much as £500m a year.
John Low, chief executive of CAF, said: "We are delighted that the government has responded to the challenging calls from philanthropists and charities across the country and taken the bold decision to exempt charitable donations from the cap on tax relief.
"We acknowledge and welcome the Chancellor’s decision to do the right thing and exempt charity donations from the cap."
Sir Stuart Etherington, chief executive of the National Council for Voluntary Organisations, said the move was a "victory for common sense". He added: "This is a great day for philanthropy."
Sir Stephen Bubb, head of the chief executives body Acevo, said Osborne had "done the right thing and I applaud him for doing so".
Jon Trickett, the shadow minister for the Cabinet Office, said the u-turn was welcome but "too little, far too late" for charities that were already struggling in the current economic climate.
"If David Cameron and George Osborne thought through their unfair policies in the first place and listened to the sector, this embarrassing U-turn would not have been necessary," he said. "Instead, they have shown just how out of touch and incompetent they really are."