To fulfil the Labour Government’s commitment to ‘Get Britain Giving in the 21st Century’ the chancellor, Gordon Brown introduced in his 2000 Budget a series of significant changes to the tax regime designed to boost giving levels. This article outlines some types of tax-effective giving available to you today and uses research data to provide valuable insights on the impact of these changes to date.
Making the most of tax-effective giving
‘Tax-effective giving’ is not a brand of giving in itself but it refers to a restricted range of ways of giving that attract tax reliefs. These ways of giving are:
- Donating through the Gift Aid scheme
- Donating assets, including shares and securities
- Payroll giving – giving directly from pay before tax
- Covenant giving – although this way of giving is generally now replaced by the Gift Aid scheme
- Bequeathing a legacy or part of a legacy to one or more charitable organisations.
- Types of tax-effective giving explained
1) Gift Aid
Through the Gift Aid system an individual can make one-off donations to a charity (or a church) and the charity can reclaim the basic rate income tax (22%) on it or a company can make gross payments and get a corporation tax deduction. Also charities can get 22% tax relief on donations from individuals from higher income brackets while the donors get the other 18%.
Since April 2000 all charitable donations including small one-off donations can be tax-effective as long as the donors declare their tax status. The paperwork for both donors and charities has been simplified and donors can make their Gift Aid Declarations using paper forms, over the phone or online.
Gift Aid is worth over £500m each year in new income to charities, having more than doubled since 2000. While a few years ago a Gift Aid box was an unusual enclosure in a charity’s mailing – today is so common that most donors don’t remark about it or don’t even notice it anymore.
One way of utilising Gift Aid effectively is by opening an account for all your charitable giving. Charity accounts are available from Charity Aid Foundation (CAF) and Stewardship (formerly Stewardship Services). Once a person has decided how much they want to give they can transfer this amount to their charity account and distribute it to as many charitable causes as they like to give to and as often as they wish to give. Both CAF and Stewardship distribute the money on the behalf of the donor, claim the tax relief and add it to the balance of the account and send regular statements to donors to update their giving records.
Commenting on the benefits of having a giving account Sylvia Bellsham from Stewardship says: “When taxeffective giving changes were first introduced in 2000 we saw a decline in the number of individuals applying for our giving accounts. I guess some people thought that they could do it themselves. But now we are seeing people coming back to us, having realised that is it good to have one account for giving to their churches, to mission agencies, Christian workers or Bible college students. This means that they don’t have to worry about keeping records of their gifts for tax purposes (we do it for them) or they don’t have to keep changing standing orders if they change church or if their friends come back from the mission field. A flexible stewardship account makes charitable giving fun and easy to do.”
2) Payroll Giving
Payroll Giving is available to employees on PAYE if their employers offer the scheme. Donations are made direct from salary before tax, thus reducing the cost to the donor. For example a gift of £10 costs the donor only £7.80.
How does payroll giving work in practice? As a payroll donor you can authorise your employer to deduct regular charitable donations from your pay.
Your employer then pays these donations to a Payroll Giving agency approved by the Inland Revenue, which distributes the money to the charity or charities of your choice. The Payroll Giving agency will send you a charity nomination form for you to complete and return directly to the agency.
Alternatively, the agency might provide you with a charity card or cheque book so that you can give directly to the charities of your choice. If the donor wanted to keep their choice of charity confidential from their employer the Payroll Giving agency would enable them to do so.
Today over 400,000 employees in over 8,000 organisations are donating through payroll giving schemes and the income to charities has increased from £ 72m in 2002 to £86m in 2003. Admittedly, more employers could use the scheme as a way of encouraging their employees to give. Perhaps this is one method of giving that Christians who run their own businesses or Christian charities can explore and see whether they can offer this service to their employees.
3) Gifts of Shares and Securities
Another income tax relief that came into effect from April 2000 applies to gifts to charities of shares and securities of listed companies at their current market value. Where higher rate tax of 40% is payable, full tax relief at this rate is allowed. Gifts of shares and securities also benefit from capital gains tax relief.
For example, a gift of £1,000 in shares may cost the donor only £200, because he or she will receive £400 of higher rate income tax relief on the gift and up to £400 of capital gains tax relief.
Charities receive over £150m annually in gifts of shares and securities despite the fact that they have invested very little in the way of promoting this method of tax-effective giving. Often financial planning and asset management professionals play a crucial role in encouraging and advising people to make gifts of shares. David Flowers, director of Ronald Blue Ltd, a Christian Financial Planning and Asset Management firm confirmed this saying that advising high–earners (individuals and couples) about making their giving tax-effective is an important dimension of their financial services. “Without disclosing client specific information,” says David, “I can think of several clients who have come into significant wealth and have given through share transfer or property transfer. In particular, we had one client who became a dot.com millionaire and he gifted a significant chunk of his shares to a charity, which sold them subsequently. It saved a great deal of tax and hassle.”
4) Legacy Giving
Legacies, gifts and bequests to charities are generally exempt from the 40% inheritance tax and there is no capital gains tax on death. This means that both a person’s favourite charity and their close relations can benefit from their estate.
Today many churches and Christian organisations are promoting legacy giving through a number of specially designed publications that encourage their congregations and supporters to include them in their will.
Benefits of the tax-effective giving schemes
From the donors perspective the main attraction of tax relief on giving is that it allows the individual to express their preferences about which charities should benefit from government money - so it increases donor’s personal responsibility and a sense of belonging to the wider community. This can be described as a ‘win-win’ situation for the donor, the charity and the wider community. In the case of Christian charities or churches this means that a portion of government money can be channelled through tax-effective giving towards the causes and projects that further the purposes of God’s Kingdom.
Many charities and churches have benefited from the extra income available to them especially through Gift Aid and legacy giving. An informal survey of 12 fundraising staff in Christian organisations showed that they were already using the additional income recovered from tax relief on regular and one off gifts to expand their ministries. Several of them also stated that the promotion of legacies is paying off with some substantial gifts, but there was caution about the fact that legacy income is often unpredictable.
Who gives tax-effectively?
During the 2001/2002 period UK charities (including churches) received over £2 billion from individuals who gave in tax-efficient ways. This figure included over £437 million in tax reliefs paid to charities by the government. The largest portion of this giving (£1.98 billion) was donated through Gift Aid, while the remainder was donated through payroll giving. In addition to these amounts, legacies and gifts of shares from individuals have generated a further £1.6 billion annually.
According to Cathy Pharoah, the head of research at CAF, “There are some small but significant differences in age between people using different tax effective giving schemes. Older, higher income individuals preferred to use covenants. Payroll givers are spread across all age bands, with a majority in the 35-44 group. Gift Aid use has been confined to those over 35 years of age.” The distribution of tax-effective givers might be somewhat different in the Christian sector where charities and churches have promoted the Gift Aid scheme in regular basis to supporters and congregations.
Furthermore, survey data from (CAF/IR/NCVO 2000) has shown that tax-effective givers differ from non-tax effective givers in a similar way to donors differing from non-donors. Taxeffective givers are more likely to be middle or upper-class individuals, they are more likely to be married, to be the male head of the household, welleducated, in full–time employment and giving more significantly than non-tax effective givers. Evidence from the same survey also suggests that taxeffective givers are more likely to consider important the kind of cause they support and the trustworthiness of the charity when they are making a decision to give. This can be taken to suggest that tax-effective givers may be more committed and involved in giving than others.
Are charitable tax-reliefs the main way to increase charitable income?
Since the introduction of changes to tax effective giving churches and Christian charities have been relentlessly promoting tax effective giving, especially the Gift Aid scheme and claiming tax relief on all their gifts. The majority of churches have converted their regular givers to Gift Aid users and they make available to their congregations and visitors special envelopes incorporating Gift Aid Declarations. Also most Christian charities have incorporated Gift Aid Declarations in their appeals and will automatically send out a Gift Aid Declaration forms to their new donors. In fact, the conversion rate of eligible donors to Gift Aid among Christian charities and churches is on average 68% compared to an average of 45% amongst other charities.
All the financial evidence available shows that tax effective giving has proved to be a highly beneficial way for churches and charities to increase their income from government tax breaks. However, a very important question that still remains unanswered, is whether or not tax breaks can stimulate increased giving?
Although there is no data available on this at present, there are plenty of cautionary voices in the Christian charitable sector reminding us that as Christian we need to keep first things first and promote biblical stewardship principles to encourage people to increase their giving. As Wren Hoskyns-Abrahall, Stewardship Adviser of the Episcopalian Church of Scotland puts it: “All of us should encourage people to give in tax efficient ways, but this consideration must come a poor second to the practice of biblical stewardship that puts God in control of our wallets as well as our prayers. As a denomination we are doing well on promoting tax-efficient giving but are vastly lacking in understanding and promoting our role as stewards. Let’s be clear that God’s ways are not the world’s ways and it is more important to try to understand God’s ways than to be diverted by the world’s tax regime.
“A large proportion of ministers and, probably, a greater one of laity, would be happy for us to concentrate solely on promoting tax-efficient giving as talking about Christ-centred giving is a much more challenging, risky and daunting topic which might make some of our congregation members uncomfortable. However, we should not allow the popular agenda to divert us from God’s agenda!”
For setting up payroll giving schemes please visit www.sogive.com
For donating online to a variety of charities, including Christian ones visit: www.givenow.org