Give to charity and get one back on the government

Rising taxes are bad news but the silver lining in the austerity cloud is that tax relief available for charities is also on the increase. We explain how the government is inadvertently encouraging us to be more charitable.

Tax pain has silver lining for charities

When individuals are thinking about making a gift to charity, supporting good work in particular fields of charitable activity is normally the predominant motive. Nonetheless, the fact that gifts attract really very generous tax treatment is an added attraction and a boost to individuals’ philanthropic instincts. 

In respect of basic rate taxpayers, charities benefit under Gift Aid by recovering the basic rate paid. The benefit for higher rate taxpayers is greater.

If a higher rate taxpayer earns £1,000 income, after tax he is left with £600. If instead he gives £800 to charity, the charity can reclaim the basic rate already paid and ends up with £1,000. The tax relief removes the higher rate tax liability. The taxpayer does not directly benefit, but the £600 he would have had left is turned into £1,000 in the hands of a charity. 

Under the new rates of tax that same calculation means that the taxpayer's £500 net amount is turned into £1,000 in the hands of a charity.

So for top rate taxpayers with the new rates of tax, the tax benefit is that much greater and one perhaps unintended effect of the increases in rates of income and capital gains tax is a boost to charitable giving by wealthier individuals. It seems that the chancellor's squeeze on tax rates is encouraging more individuals to give more to charity.

High earners feeling charitable

There seems to be an attraction, to those smarting at the injustice of such a high rate, of looking to ways to beat it. For some individuals it is almost as though their dislike of paying tax at penal rates means that they would prefer to forego that £500 net figure for the pleasure of avoiding paying the government so much. And if that can be done helping good work by charities, then the feel-good factor from that and the satisfaction of beating the system proves quite a powerful combination!

Professional advisers are at present seeing many people motivated in this way. As well as higher rate taxpayers, those earning between £100,000 and £150,000 have a higher marginal rate on their top slice of income and the tax attractions for them are even greater.

The rise in the capital gains tax rate to 28% is a further incentive for giving, with assets such as shares capable of benefiting from Gift Aid in the same way as cash.    

It has also been noticed that there is something of a trend amongst non-domiciled individuals to increase their charitable giving, perhaps even to the extent of wiping out their UK income tax liability entirely.

Of course gifts to charities have always benefited from relief from inheritance tax and this remains a strong incentive, particularly to those affronted by the notion of a tax payable on death on assets which have almost certainly already suffered income and capital gains tax during lifetime. Again, there is no strict financial logic, as you are turning a net receipt worth £600 to individual beneficiaries into an actual receipt by the charity of £1,000, but for many that £400 not going to the government is appealing, and again adds to and prompts the philanthropic motive.