Ministers' anger at charity tax could force George Osborne to back down

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 an individual'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, 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 he and Mr Osborne were united 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. Both Number 10 and the Treasury will be nervous about admitting a U-turn, which could add to the impression that the Budget is unravelling after criticism of the so-called "granny tax" and the "pasty tax". However, Whitehall sources believe the donations cap will now be "tweaked" in an attempt to allay the charities' fears.

A survey of 120 senior charity executives published today found that almost nine out 10 believe the cap will hit their gifts from major donors, with half of those predicting their big donations would fall by at least 20 per cent. John Low, chief executive of the Charities Aid Foundation which carried out the survey, said: "Ultimately, it will not be the rich who will lose out. It will be the most vulnerable people in society, and the other causes charities support."

Tory MP Conor Burns said: "I think it's time we do a quick review and retreat on this." Mark Pritchard, secretary of the 1922 Committee of Tory MPs, said: "This appears to be going in the opposite direction of encouraging philanthropy and major giving to charity."