Ministers' climbdown after criticism that financially prudent schools would be unfairly hit.Headteachers have welcomed a Government U-turn over plans to claw back money lying unused in school bank accounts.
Jim Knight, schools minister, announced that local authorities will not now be forced to redistribute 5 per cent of unspent reserves, as had been planned.
The climb-down follows criticism that the claw-back would have unfairly punished schools which had been financially prudent.
In a statement to parliament, Mr Knight said the department would continue to monitor surpluses, which currently total around pound;1.6 million. The issue would be revisited in three years if there was not a significant reduction in that figure, he said.
He acknowledged that schools had raised reasonable concerns during consultation on the issue.
Schools and unions were particularly opposed to plans to base the claw-back, originally planned for next March, on 2007 surplus figures.
George Phipson, school funding consultant for the National Association of Head Teachers, said the proposals would have been like "punishing the whole class for the actions of one naughty child".
Welcoming the announcement, he said: "It would have been unacceptable and outrageous to tax schools like this. There are schools out there hoarding money unnecessarily and they need to be targeted, but local authorities already have the power to claim back excessive balances that are not committed to projects."
John Dunford, general secretary of the Association of School and College Leaders, added that the new three-year budgets for schools from 2008 should help reduce the need for over-cautious budgeting.
Local authorities also welcomed the climb-down. Some had complained that schools which were storing money to fund back-pay after job evaluations would be unfairly hit.
Staffordshire Council had recommended its schools should do this. Peter Traves, the council's corporate director of finance, said the Government's move "acknowledges that decisions like this should be made on a local level".
However, two unions have challenged the climb-down. The Association of Teachers and Lecturers said the Government had been "timid".
Chris Keates, general secretary of the NASUWT described the move as extremely disappointing.
"This was never going to be a universally popular move," she said.
"Monitoring doesn't improve things any more than measuring a child makes it grow.
"What is needed is intervention and action now - not in three years' time."