Since the Budget announcement that higher rate tax is rising to 50%, those of us who research giving have been bent over calculators trying to work out the implications for donors.
There’s been 2 types of response. Pessimists say, “people will feel poorer and pissed off at paying more tax so will donate less, aggravating any recessionary effect”. Optimists say, “giving just got cheaper – higher tax means higher tax relief, which could counter any recessionary effect.“
So who’s right? In my experience – as both a fundraiser and a researcher – tax issues are not deal-makers or deal-breakers, but they are awfully handy for post-hoc rationalisations. Non-donors often say “I pay enough tax and have nothing to spare”, or “My tax is my donation to the greater good”. Some even blame the tax system for being too complicated:“I’d give more if I understood how the tax reliefs work”.
I used to have no sympathy with that ‘tax breaks are complicated’ view. Under the Gift Aid scheme, so long as you’ve paid enough tax that year, all your donations are eligible for full relief. How complex is that? This proposition was once beautifully illustrated by an animal charity that sent supporters a leaflet showing a basket of 3 kittens that had benefited from their donation. The donor lifted a flap to reveal a 4th kitten which the donor could help simply by signing a Gift Aid form. But post-Budget, the depths of my innumeracy have been revealed and I too have struggled to calculate exactly how many kittens, or parts of kittens, will benefit when tax rates rise by 5 or 10%.
So I turned to the most financially astute person that I know, Professor Gareth Morgan of Sheffield Hallam University, who supplied these calculations and agreed I could share them:
Standard position for a 50% taxpayer – A £1000 net donation is worth £1250 to the charity with basic rate tax reclaimed but £1282 including the gift supplement (until 2011). The gross value of the gift is £1250 and the donor on 50% tax thus get an extra 30% personal relief = £375 (50% – 20%) . So the net cost to donor is £1000 – £375 = £625. So a gift which costs the donor £625 is worth £1282 to the charity – ie. the value to the charity is 205% of what it costs the donor!! Or conversely a donor who wants to fund a major item for a charity only has to sacrifice 48.75% of the final cost – i.e. £1m to the charity can be given at a cost of £487K to the donor.
Gareth concludes: This must be the best charity giving tax break anywhere in the world!
And if those figures didn’t make you dizzy enough, he adds:
If the donor is clobbered by the tax relief on pension contributions being limited to 20%, a donation to charity is much more tax efficient than a pension contribution – this is a completely new phenomenon. Also, however, the a large gift aid donation may have the effect of keeping the donor’s net taxable earnings closer to £150K and hence they may still get better relief on pension contribs than otherwise. Also for donors just over £100K taxable income in the band where the personal allowance is lost (£100K to £112K) the benefits of gift aid are phenominal. The person is effectively on a marginal tax rate of 60% but a decent gift aid donation could keep them out of that.
Is it time to put the calculator back in the drawer and start spreading the good news to donors that pay higher rate tax?