Chancellor George Osborne has made his third Budget U-turn in less than a week, scrapping plans to cap tax relief on charitable donations after coming under massive pressure from charities.
Labour said the Budget had become an "embarrassing shambles" after earlier climbdowns over VAT on hot pasties and caravans.
Charities said they were delighted that the Chancellor responded to their Give It Back, George campaign, which was supported by more than 1,000 voluntary sector organisations.
The cap, limiting tax relief at £50,000 or 25% of income (whichever is higher), was proposed in Mr Osborne's March 21 Budget and was expected to save the Treasury £50 million-£80 million a year.
The Chancellor told MPs then that it was wrong to allow wealthy individuals to make "unlimited" use of income tax reliefs. It is understood that he was particularly concerned about donations to bogus foreign charities being used to avoid tax in the UK.
Charities warned that they stood to lose a significant proportion of the £1.4 billion of donations on which reliefs are claimed each year, and Conservative MPs complained that the measure did not fit with the Government's policy of promoting volunteering through the Big Society idea.
The Treasury had been holding talks with charities and major donors to assess the likely impact of the change but no announcement was expected until the end of a consultation this summer.
Mr Osborne has now written to representatives of the sector to tell them he was ditching the cap proposal, while pressing ahead with limits on other income-tax reliefs for the wealthy.
"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," said the Chancellor.
"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."
Labour accused Mr Osborne of trying to "bury bad news" by unveiling his latest climbdown during the parliamentary recess, at a time when Culture Secretary Jeremy Hunt's evidence to the Leveson Inquiry was dominating the news agenda.
The judgment of Mr Osborne and Prime Minister David Cameron was "increasingly in question", shadow Chancellor Ed Balls said.
"Another day, another Budget tax U-turn - three successive U-turns in four days - all when Parliament is not sitting and just a few weeks after ministers were defending these measures, show just what an embarrassing shambles George Osborne's Budget has become," said Mr Balls.
"But George Osborne and the Treasury are fooling no one when they claim to have cleared up their Budget mistakes. We now need to see a rethink on the biggest blunders in the Budget: the tax cut for millionaires while millions of pensioners and families are asked to pay more and the total absence of a plan for jobs and growth."
The £50 million-£80 million cost of the decision follows the £70 million hit to the Treasury from U-turns on the pasty tax and caravan tax earlier this week.
Exchequer Secretary David Gauke insisted that the Budget remained "fiscally neutral" as the Chancellor had built into his calculations a "buffer zone" large enough to absorb the changes without adding to state borrowing. And he denied the timing was designed to limit embarrassment to Mr Osborne.
"Having reached our conclusion, I think it is only fair that we announce it to the public as quickly as possible to end the uncertainty," Mr Gauke told the BBC.
"This is not news that is going to be buried, and there is no intention by us to do that."
Sir Stuart Etherington, chief executive of the National Council for Voluntary Organisations, hailed the decision as "a victory for common sense".
Charities Aid Foundation chief executive John Low 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."
Sir Nicholas Hytner, artistic director of the National Theatre, said: "It's pretty impressive to admit having made a 100% mistake and to put it right."
But venture capitalist Jon Moulton, a major Conservative donor who announced he was withdrawing financial support from the party over the issue, said charities have already been hurt by the uncertainty of the past few weeks.
"It was a bad decision," he told BBC Radio 4's World at One. "I am pleaded they have had the nerve to actually reverse it. It seems to reflect a lack of proper consideration before the stuff was put out. Nobody had thought through the implications of doing it."
The chairman of the Commons Treasury Committee, Conservative MP Andrew Tyrie, said the succession of U-turns would encourage "vested interest groups" to press for concessions on measures in next year's Budget.
Ministers had made a rod for their own backs by allowing so much of the Budget to be briefed to the press in advance, he said.
"With so much pre-briefing and leaking of the major measures in the Budget, the Government lost the opportunity to explain a coherent package of tax reforms," said Mr Tyrie.
"The few measures not leaked attracted disproportionate attention, forcing one concession after another."