Rich Donate To Charity To Avoid Income Tax, Says Number 10

Some of the wealthiest people in the country are donating to charities which "don't do a great deal of charitable work" in order to "wipe out" their income tax bills, Downing Street said today.

No 10 strongly defended controversial plans in chancellor George Osborne's Budget to cap tax relief on charitable donations, saying it was necessary to prevent "abuse" of the system.

The move has prompted an outcry from charitable organisations, who fear that big donations will dry up as a result.

However, the prime minister's official spokesman said that ministers had acted to stop wealthy individuals "exploiting" the system to pay less in tax than the average family.

"In certain instances they may be giving to charities and those charities don't, in all cases, do a great deal of charitable work," the spokesman said.

"The reason that the Chancellor decided to bring in the cap was that certain individuals in this country on very high incomes are exploiting these reliefs to reduce their tax bills.

"We cannot be in a situation where very wealthy individuals are able to wipe out their bills by using these reliefs.

"We don't think it is right that someone on a very high income is paying far less tax than the average family in this country."

In an interview with The Daily Telegraph, Mr Osborne said he had been "shocked" to discover that some of the wealthiest people in the country were paying "virtually no" income tax.

The Chancellor said he had seen "anonymised" tax returns submitted by multi-millionaires using aggressive avoidance schemes to dramatically reduce their tax bills.

HM Revenue and Customs (HMRC) found that the income tax rate among some of the highest earners was, on average, only 10%.

Mr Osborne said the HMRC study had convinced him of the need to take action to ensure high earners paid more tax.

In last month's Budget he limited how much people could offset their tax bills by investing in businesses or donating to charity.

Anyone seeking to claim more than £50,000 of tax relief in any one year will have a cap set at 25% of their income from 2013.

"I was shocked to see that some of the very wealthiest people in the country have organised their tax affairs, and to be fair it's within the tax laws, so that they were regularly paying virtually no income tax. And I don't think that's right," Mr Osborne said.

"I'm talking about people right at the top. I'm talking about people with incomes of many millions of pounds a year.

"The general principle is that people should pay income tax and that includes people with the highest incomes."

Charities have warned that limiting tax relief on donations will reduce philanthropic giving.

But Mr Osborne said: "I was very clear in the Budget that we are specifically looking at making sure we are still encouraging philanthropy and charitable giving. But that is a specific issue we can deal with."