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How a £1m donation will be impacted by the tax relief cap
Confused by the tax relief cap and how it will affect donations by higher-rate taxpayers? The British Red Cross provides a breakdown of the numbers.
Current system
Under the current system a donor receives a tax relief on donations that they have made to charities. Note that this is a tax relief and not a tax reclaim. This means that it reduces the amount of income that they pay tax on, they do not make a ‘reclaim’ in the way that charities do to get their element of the gift aid benefit. A donor has no personal tax benefit from making a donation as the relief is directly linked to the donation made. The aim of the relief is to ensure that people are not additionally disadvantaged by making a donation by having to pay tax on the money that they no longer have and have not benefited from as it has been given to charity.
In the case of giving of shares, the donor receives relief on the total amount given to the charity so the full amount donated is removed from their income before the tax calculations are made.
In the case of donations made under gift aid, the situation is a little more complicated as the charity has already claimed the tax at basic rate paid by the donor so this amount is removed from the relief provided to the donor as otherwise the Treasury would be disadvantaged by the tax being double-counted in the reclaim by the charity and the donor relief. This means that the donations are effectively being made partly out of the donor’s gross income and partly out of their net income.
Here is an example. A 45 per cent taxpaying donor makes a gift to charity of £1m under gift aid:
Charity claims in gift aid | £250,000
| £1m gift x 20/80 (basic rate tax – see figure 1 below for how this is calculated) |
Charity receives | £1,250,000 | £1m gift + £250,000 reclaimed |
Donor gets relief of
| £312,500
| £1,250,000 x 25 per cent (45 per cent – 20 per cent already claimed by charity) |
Net cost to the donor | £687,500
| £1m - £312,500 |
The cost to the donor is £687,500 for making a donation to charity of £1,250,000 (ie 55 per cent of the amount the charity has received).
Prior to April 2012, donors were able to donate their tax relief to charity through their tax returns. If they did this then the cost to the donor would have been £1m and the charity would have received £1,562,500 (£1m donation + £250,000 gift aid reclaim + £312,500 in relief donated by the donor). The facility to donate this tax relief has now been removed from the tax return system so the donor has to make another donation under gift aid if they want to donate the relief in this way. In theory, the charity could then claim gift aid on this donation and the process above would be repeated in the same way with the donor receiving relief again.
Figure 1This is made from the net income, so instead of multiplying by 20 per cent it is necessary to multiply by 20/80 or 25 per cent. £250,000 tax is 20 per cent of £1,250,000 (gross) but to get from £1m (net) to £1,250,000 (gross) it is necessary to add 25 per cent to the net |
Proposed system
The current system has been challenged – partly due to the complications in calculations, partly due to difficulties for higher-rate taxpayers who do not complete tax returns to receive relief because they pay tax via PAYE, and most recently with the suggestions of tax avoidance through giving with the proposal of a new cap on donations relief in the 2012 Budget.
If the framework is changed so that all donations are made from the net income (ie after the donor has already paid tax) and the charity is able to reclaim all the tax paid then there are no risks of tax avoidance, but donors are still able to give without being disadvantaged beyond the cost of the transaction – but the charity will receive the full gross donation amount. This would simplify tax returns as donations would effectively be taken out of the self-assessment system.
In this case, using the example previously, the donor could make a gift of £687,500 and the charity could then claim £562,500 (£687,500 x 45/55 – see figure 2 below for how this is calculated) which would make the donation received by the charity £1,250,000. Alternatively if the donor made a gift of £1m then the charity would claim £818,181 which would make the donation received by the charity £1,818,181.
Figure 2As with the previous example for the basic rate calculation in figure 1, 45/55 is the calculation for the tax reclaim for a 45 per cent donor on a net donation to make it the value of a gross donation. |
There are already mechanisms in place and tight auditing of charity gift aid claims so tax avoidance should not be an issue. The only challenge is then to find the best mechanism for the notification of higher-rate taxpayers and process for managing the claims and processing. This needs further development to identify the most efficient process for HMRC and charities to manage. Consideration also needs to be given as to the treatment of donations of shares which are currently outside the gift aid scheme.
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John Godfrey
Managing Consultant
Artful Fundraising Pty Ltd
23 Apr 2012
My confusion remains. The piece says, "If the framework is changed...".
Is the author describing the effect of the proposed tax relief cap or some other hypothetical change?
Mark Astarita
Director of Fundraising
British Red Cross
24 Apr 2012
Response to [John Godfrey]
Yes it is complicated anything about tax always is. There will be a need to sit down with HMRC and all work togeather to try to make a system work for all. Specific mechanisms will be looked at in more detail.
Right now the debate to be won or lost is the principles of the hypothetical change to the framework for charities to be able to receive the tax we are seeking agreement on at this stage. The devil is not in the detail if there is goodwill on all sides and everyone want's charity to be the winner not the loser.
Henry McLaughlin
23 Apr 2012
Mmmh, except you miss out the point that the Treasury misses out on this potential income because it has gone to a charity and therefore has to be made up by ordinary taxpayers.
Why should it be assumed that because you are wealthy you have a better idea of how to spend money than that democratically decided?
I'm not convinced that 'charities' such as Eton are somehow preferable recipients of public spending.
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B Gower
24 Apr 2012
I too am confused
I understood that HRT relief was based on the concept of the difference between basic rate and the higher rate. This proposal seems to assume that all the income is taxed at the higher rate - in the example at 45%. But what if the donor is just over the tax border - say at £160,000. If I understand it correctly, some of his income would be taxed at 20%, most would be taxed at 40%, and only £10,000 would be taxed at 45%. However, the example quoted seems to indicate that the charity would received a contribution of the donor's (effective) tax relief, based on 45% applied to the whole donation
[Reply]
Mark Astarita
Director Fundraising
British Red Cross
25 Apr 2012
Response to [B Gower]
Yes there is movement between tax bands and yes people loose jobs, move up a band, stop paying basic rate etc. We claim gift from 87% of the population on the standard rate currently without the movement in and out of tax bands proving a problem. We can never know all the movements that go on in a persons life let alone their tax affairs. Again some goodwill from government will go a long way.
Short of a consolidated GA rate (which would be great but unlikely for now to achieve concensus) our ideas add value to charities large and small and have to be worth exploring.
If we get capped we as a sector will be poorer. If the status quo remains we get the same. If charities not individuals can claim the high rate relief millions more will go directly in to good causes.
[Reply]