Charitable Donations... From the Government?

Barry Leigh is a partner at accountants Cohen Arnold, which acts for a wide range of charities. Here he outlines the various ways in which the government helps donors to give to charities in the most tax-effective way.

For further information, you can contact him at:

Cohen Arnold, New Burlington House, 1075 Finchley Road,
London NW11 0PU. Tel: 020-8731 0777

Many people have a charitable streak in them and feel honoured to be able to donate to charitable causes. But, does the government mirror their dedication?

In a nutshell: Yes!

The government assists in many forms, for example extending grants to certain charities and by providing generous tax reliefs to charities and their donors. Cash and monetary contributions are by far the most common form of donations and in this article we consider the key tax benefits available to individual donors and how they may be achieved. One word of warning: it will be appreciated that donations must be bona-fide and the donor is prohibited from receiving any benefits (unless “minimal”) from the recipient charity...

Basic Gift Aid (GA)

Payments made under GA are the most widespread form of donations encountered and allow the recipient charity to reclaim the Basic-Rate of Income Tax, currently 20%, and a further transitional 2% from
HM Revenue & Customs (HMRC).

Essentially, the donor makes a payment to the charity of his choice from his taxed income, e.g. from his taxed earnings in his bank account, and signs a Gift Aid Declaration (GAD) form confirming to the charity that the donor has made the payment as a charitable donation and that he has paid sufficient tax to cover the tax reclaim to be made by the charity. By way of example, a donor makes a payment of £100 under GA. The charity will reclaim £28 from HMRC with the result that the charity has received a total of £128. Basically, the individual's Basic Rate of tax in relation to that donation has been passed to the charity procuring the desired tax relief.

For individuals who are Higher-Rate taxpayers - currently paying tax at 40% (and potentially 50% from April 2010) - further tax relief is available through a mechanism in the personal tax return which defers the Higher-Rate Band commencement by the amount of the GA payments resulting in less income being taxed at the Higher-Rate. In fact, the tax return allows for this extra tax saving to be nominated for payment to a charity of the taxpayer's choice under GA effectively allowing the taxpayer to have two bites of the same cherry!

Aside from the purely financial benefits, the GA scheme enables:
•            The charity to compile a detailed database of donors' details;
•            The donor to specify that all donations made to that specific charity from a particular date henceforth are to be considered as made under GA.

It is important that charities maintain all GADs and proper records of all GA
donations received with a register of benefits provided to donors. Records should be kept for 6 years and HMRC could “audit” the charity's tax reclaims.

The GA scheme has certain inconveniences such as the need for the donor to:
•            Remember to advise charities of the ineffectiveness of GADs, for example where there is insufficient tax paid to cover reclaims;
•            Complete separate GADs with each charity that he donates to.

Two methods exist to deal with these issues:

1. Give As You Earn (GAYE)
   - Payroll Giving

As its name suggests, this method is only available for employees; self-employed individuals would donate under GA. GAYE is an arrangement where the employee arranges with his employer to make a payment to a HMRC-approved Payroll Giving Agency (PGA). The employee simply fills in a form directing the PGA what payments are to be made to which charities and their frequency thus removing the need to complete numerous GADs. The employer makes the payment from pre-taxed income, e.g. if the employee earns £1,000 and decides to donate £300, the employer would pay £300 to the PGA leaving only £700 subject to tax. The employee automatically obtains 100% immediate tax relief at source, whether he is a Basic-Rate or Higher-Rate taxpayer.

2. Charity Cheques

A charitable institution (CI) is formed which accepts donations (under GA or GAYE as appropriate) and allocates same into donor-specific “charity accounts” somewhat akin to bank accounts but obviously restricted for charitable purposes only. The donor is presented with a cheque book with which he can issue charitable donations thereby obviating the necessity to sign many GADs.

Technically, it is not the donor that makes the donations to the end-recipients; rather, the CI honours the wishes of its donors by making donations in accordance with their preference. As a result of this, a key benefit arises as follows. The donor can only obtain tax relief where donations are made to UK registered charities, whereas the CI can make donations to needy individuals and foreign charities so long as this accords with its charitable objects. The individual donor can therefore channel the donations which have had the benefit of tax relief at the point of donation to the CI in a variety of charitable measures not available under GA and GAYE. 
Naturally, it would not be unreasonable for the CI to earmark a proportion of the donations it receives towards its administrative expenses and a 5% allocation is common.

Finally, It should be noted that the National Insurance Contributions liabilities of donors and employers are unaffected by GA and GAYE arrangements; the only reliefs available are those in relation to Income Tax.

The above is a synopsis of the main methods available to individual donors, however, it should be appreciated that there are many complications that can arise and appropriate professional advice should be obtained.