The government has dropped plans to have councils claw back budget surpluses from schools in England.
There had been alarm about the plan among school leaders
Ministers had proposed a 5% levy on excess cash held by schools - said to total £1.7bn - backdated to March.
The move, put out for consultation in March and confirmed in June, angered many head teachers and governors though some teachers' unions supported it.
Now ministers have dropped the plan - but warn they may act in future if excessive surpluses are not reduced.
The Department for Children, Schools and Families defines "excessive" as more than 5% of a secondary school budget and more than 8% for a primary or special school, after taking into account money committed to specific projects.
It says 38% of schools have such excessive balances.
The proposals however would have applied to all schools with a surplus at the end of the financial year, however small.
The local authority would have taken 5% of all these surpluses then shared out the resulting pot.
Education minister Jim Knight had suggested the retrospective element of the move alone might be dropped.
This aspect had caused particular annoyance, because it could have meant schools being penalised for having had a surplus months ago even if they had since spent it.
In a statement to the Commons, Mr Knight has now gone further. He said he recognised schools' reasonable concerns.
Among these were the fact that the proposal would have applied to all revenue surpluses - and could include the proceeds of fundraising by parents, as well as small amounts prudently carried forward from one year to the next.
"Rather than proceed now we will continue to discuss these detailed concerns with schools and work with local authorities to lower excessive surplus revenue balances," he said.
The department would continue to monitor surplus balances during the forthcoming three-year spending review period.
"If the levels reported do not show a significant reduction we will come forward with further action, having resolved the technical issues, for implementation during the following spending review period," he said.
Liberal Democrat education spokesman David Laws said: "This daft idea should never have seen the light of day.
"Ministers must now come clean and accept that these proposals were wrong, and assure schools that they will not seek to resurrect them in a year's time when the row has died down."
Shadow Schools Minister Nick Gibb called it a "partial climbdown".
"The government should have ruled out this plan to penalise prudent schools altogether but their instinct for top-down direction is still as strong as ever."
National Governors' Association chief executive Phil Revell said it did not oppose clawback in principle.
"Many schools are in fact building funds for specific projects, but there are too many examples of unidentified funds being held in reserve from year to year."
NASUWT teachers' union general secretary Chris Keates said: "This was never going to be a universally popular move and vociferous discontent from those with vested interests could have been anticipated," she said.
"Parents should now be asking why a situation has been allowed to develop where their children could actually leave their primary or secondary school without ever having received their full funding entitlement."
The Association of School and College Leaders welcomed the government's change of heart.
General secretary John Dunford said: "The issues around the minority of schools that retain large uncommitted balances are real and important, but there are already measures in place to address the issue locally."
Mick Brookes of the National Association of Head Teachers called the government's decision "a victory for common sense".