Today the chancellor, Rishi Sunak, announced plans to reduce the income tax rate to 19% from April 2024, which would have a knock-on effect on the amount of Gift Aid for charities.
However, the government said a three-year transition period would effectively maintain what charities can claim from the tax relief at similar levels in the short term. The Charity Tax Group (CTG) estimates that without the transition support the move would have cost the sector £250m over three years.
The percentage point reduction to the basic income tax rate, which is the first cut for 16 years, represents a tax cut worth £5bn.
Documents published alongside the statement say: “A three-year transition period for Gift Aid relief will apply, to maintain the income tax basic rate relief at 20% until April 2027.”
Gift Aid is worth £1.3bn a year to the charity sector, but according to the Charity Finance Group more than £500m is unclaimed.
Gift Aid is a scheme which allows registered charities to reclaim income tax on a donation made by a UK taxpayer. For basic-rate taxpayers this adds approximately 25% to the value of any donation.
Richard Bray, chair of CTG, said: “On its own the announcement that the rate of income tax will decrease from 20% to 19% in April 2024 would have cost the charity sector approximately £250m in lost Gift Aid over three years. However, the proposed transitional relief will safeguard over £250m of charity income.
“CTG both suggested and campaigned hard for transitional relief when the basic income tax rate was last decreased in 2007 and we are grateful that the government has had the foresight to introduce a similar measure to protect Gift Aid now. CTG will continue to campaign for an improved Gift Aid system that can result in more Gift Aid being claimed by the time the transition period ends.
“The chancellor’s statement introduces a number of important measures, some of which will help charities as employers. He has also shown flexibility on VAT and R&D tax reliefs to stimulate investment in renewable energy and in R&D. In the wake of a global pandemic, we urge the chancellor to take the opportunity to reintroduce R&D tax credits for charities and to recognise the government’s ability to introduce new VAT rates that could benefit those charities providing much-needed services.”