Jill Kirby: George Osborne's crazy cap on big donors to charities must be reversed

If you are seriously rich and would like your spare cash to go to a good cause, what should you do? I think we can assume that this week's events will make you less likely to be making a large donation to a political party. But last week's Budget has made it much less attractive for you to give a significant tranche of your income to charity.

In a move described as “stupid” by Luke Johnson, the successful entrepreneur and chairman of the Royal Society of Arts, George Osborne included in the new “tycoon tax” restrictions on the amount of tax relief available for charitable donations. Big donors will only be able to claim relief on £50,000 of gifts in any tax year, or a quarter of their income if that is greater.

The decision to include charitable donations in the tax relief crackdown is said to have been urged by Nick Clegg. Certainly it runs counter to the Conservatives' declared aim of encouraging philanthropy, and casts doubt on the coalition's commitment to promote a bigger voluntary sector as a healthy alternative to big government.

In a statement defending the crackdown HMRC said “It is necessary to ensure the very wealthy cannot simply wipe out their tax bills using charitable and other reliefs.” But if you want to give half, or three quarters, or indeed all of your income to charity, why should you be expected to pay tax on it as well?

The Charity Commission requires that all charities currently eligible for Gift Aid relief must benefit the public, and the rules are tightly drawn so that individuals who set up charitable trusts cannot use them to divert funds to their personal advantage. Income given to charity is income forgone. But now, in the eyes of HMRC, money given to charity is regarded as inherently less worthwhile than money handed over to the state in the form of taxation. This attitude should be anathema to Conservatives - indeed it's hard to square with any recognisably Liberal philosophy.

If wealthy philanthropists are in part motivated by the desire to see their money spent by charities rather than squandered by government, surely that is a good thing? Moreover, there is no doubt that tax relief is a major incentive to donate, especially if you are paying 40% or more of your income in tax. Frustrating the tax man may not be the most noble of reasons for giving away your wealth, but if the effect is to help the most needy, both in this country and throughout the world, we should celebrate rather than denigrate the process.

By treating large charitable donations as a form of tax evasion, the government is giving a bad name to a good process. It's surely the worst kind of message for a government to send out at a time when the voluntary sector is needed more than ever.

A key reason why the Conservative Party has been reluctant to cap individual political donations is the knowledge that its most generous supporters do most of the heavy lifting. As grassroots membership shrinks, party fund-raising is ever more dependent on a handful of millionaires. Unless handled with scrupulous propriety (notably lacking in recent years), such over-dependence is hazardous and open to the perception of abuse.

But we should not forget that a similar dependency on the wealthy few applies not only to our tax system (the top 1% of earners contributing 30% of revenue) but also to charitable donations. Whilst the UK still lags far behind the level of philanthropy in the USA, major donors here account for a disproportionate share of all charitable giving. According to the Charities Aid Foundation, of the £11 billion given to charity by individuals in the UK last year, nearly half was provided by the 7% of adults who each gave more than £1,200. Strikingly, 10% of the total was provided by just 200 people, each of whom gave more than a million pounds.

In these hard-pressed times, when the squeeze of inflation, frozen wages and lack of job security means that many people are finding it harder to sustain, let alone increase, their gifts to charity, why does our Chancellor think it prudent to discourage the most generous givers?

David Cameron is scheduled to speak at a Giving Summit taking place at the Natural History Museum in May. That leaves him about six weeks in which to persuade George Osborne to reinstate unlimited tax breaks for gifts to charity. If he fails to do so, the boycott of that event, already threatened by some charity leaders, could sink his hopes of a flourishing voluntary sector taking the strain off the state. It is surely better to back down now. Capping donations to the Tory party might force economies but it won't be a tragedy. Capping tax-free donations to the voluntary sector, however, will have serious and damaging long term consequences.