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Payroll giving costs rise for donors

Fundraising | Gemma Ware | 23 Apr 2008

Payroll giving has become less cost-effective for donors than a gift aided donation as a result of the transitional gift aid relief introduced in last month’s Budget. 

Payroll giving donations are taken off a donor’s pay packet before tax is applied and are based on the rate of tax paid by the donor.

However, after the drop in the regular rate of income tax to 20 per cent at the weekend, the mechanism will not benefit from the transitional relief that will see all gift-aided donations ‘topped up’ to 22 per cent by the government for the next three years.

This means that if a donor gives £10 to charity this month through their payroll it will now cost them £8, rather than £7.80 last month under the old tax rate.

Gift aid better value

But if that donor now gave their £8 through a direct debit and ticked the gift aid box, the charity would receive £10.26. While the charity will not lose out, it will be more cost-effective for donors to choose the gift aid option.

However, it is easier for charities to receive the tax benefits through the payroll than through a gift aided donation because the payroll giving scheme requires the charity to do no extra work to submit a claim to HMRC.

In 2001 the government introduced a 10 per cent supplement on payroll giving to encourage donations through the mechanism, but this stopped in 2004.

A spokeswoman from Charities Aid Foundation, which runs payroll giving organisation Sharing the Caring, said the amount charities receive wouldn’t be affected by the drop in income tax, but admitted: “Basic rate taxpayers giving to charity through a payroll scheme are likely to lose a few more pence each month in tax.”

Employees ‘not bothered’ 

Elena Joseph, head of new projects at payroll giving organisation Workplace Giving, said she was not overly concerned.

“Most employees we have spoken to regarding the tax changes are not at all that bothered that their gift of £5 will now be costing them 10p more, their charity will still be receiving the same,” she said.

Mike Wade, head of central fundraising at WaterAid, said it would not “deprioritise payroll giving” as a result of the introduction of the transitional gift aid relief.

However, Wade said the government should take care when “introducing any new policy which could be seen to promote one form of giving over another”.

“We saw this when they introduced the 10 per cent supplement on payroll giving, which resulted in donors cancelling direct debits in favour of payroll - the charities picked up the administration costs of the changes, and many of the donors failed to increase the amounts given to compensate for the money now coming from gross rather than net earnings,” he said.

A spokeswoman from the Institute of Fundraising said that comparing payroll giving and gift aid was not useful, because donors benefit from the tax relief in payroll giving, but with gift aid the charity benefits.

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