By John Willman, Business Editor

Published: December 23 2008 23:32 | Last updated: December 23 2008 23:32

The Treasury is looking at a scheme to persuade Britain’s wealthy to donate an extra £5bn a year to help relieve world poverty, at no cost to the exchequer.

Although the richest 20 per cent give most to good causes in absolute terms, they donate on average 0.8 per cent of their income to charity, compared with the 3 per cent donated by the poorest fifth.

The scheme was devised by Nobel Prize-winning economist Sir James Mirrlees and drawn up with Renu Mehta, founder of the Fortune Forum networking organisation for the super-rich.

Dubbed the MM (Mehta/Mirrlees) proposal, the scheme advocates a 50 per cent tax relief on donations towards the UN’s millennium development goals, which would effectively match pound for pound what wealthy donors give.

The cost of the tax relief would be met from the government’s overseas aid budget, effectively doubling the amount diverted to encourage donations and helping the UK meet its goal of contributing 0.7 per cent of national income to development.

Sir James, who is chairing a review of the UK tax system for the Institute for Fiscal Studies, believes the current incentives for charitable giving, with a maximum of 40 per cent tax relief through gift aid, are poorly understood.

A 50 per cent tax relief would prove much more attractive, as it did with a scheme to raise money for universities in Hong Kong where the Nobel laureate is now based. If adopted in all G8 nations, it could raise more than $78bn, he believes.

Ms Mehta said her aim was to raise the level of charitable giving in the UK, currently 0.9 per cent of gross domestic product, to US levels of 1.9 per cent.

Donors would be able to specify to which development sector their money was allocated – clean water or disease prevention, for example. Money raised would be kept separate from the government’s aid programme to reassure donors it was spent efficiently and not wasted on excessive administration.

The scheme is under consideration by the Treasury at a time when the financial crisis is expected to lead to a sharp drop in charitable legacies on which many good causes rely.

“The MM proposal sets out to boost voluntary donations for these issues whilst simultaneously freeing general government revenues to concentrate on addressing issues of high domestic priority,” Sir James said.

Copyright The Financial Times Limited 2008