NSW Premier Barry O'Farrell has announced changes that will limit political donations to individuals and introduce caps on union campaign spending.

Under changes made by former Premier Kristina Keneally, annual donation caps of $5000 to parties and $2000 to individual candidates or MPs were introduced, while donations from tobacco, liquor and gambling companies were banned.

She also restricted campaign spending, with candidates' expenditure limited to $100,000 each, while parties were allowed to spend a further $50,000 in each electorate they contested.

However, in a move that angered Mr O'Farrell, who was opposition leader at the time, third parties including Labor-affiliated unions faced a cap of only $1.05 million.

In question time today, Mr O'Farrell announced he would close the loopholes he said had led to a "decisions for donations" culture and allowed unions to spend up $1.05 million during elections.

Donations will now be limited to individuals, essentially banning those from unions, corporations, peak industry groups and community organisations.

Meanwhile, campaign spending by politically affiliated organisations, such as unions, will now be included in a party's expenditure cap.

Mr O'Farrell said "we're going to close Labor's loopholes and ensure that once and for all election funding in NSW is cleaned up".

"Unions, third-party interest groups, industrial organisations, corporations, overseas citizens and non-residents, aren't entitled to vote - our laws don't give them the right to vote, and therefore they shouldn't be able to donate," Mr O'Farrell said.

"They don't have a stake in the system, and they shouldn't be able to influence that system.

"We're also going to close the loophole where Labor's caps on political expenditure by political parties didn't include spending by affiliated organisations.

"This loophole meant that 22 unions affiliated with the ALP were treated like non-affiliated organisations, and each was given the ability to spend $1.05 million or a total of $23 million between them to support the ALP."