by Kimberley Scharf, Warwick University and Sarah Smith, University of Bristol
Individual donors currently give over £4 billion to charities through the Gift Aid scheme, enabling charities to reclaim tax relief at the basic rate of tax (worth 25 pence for every £1 donated out of net-of-tax income). Higher-rate taxpayers can also reclaim an additional, higher-rate rebate, worth a further 25 pence for every £1 donated out of net-of-tax income.
One of the aims of giving tax relief, such as Gift Aid, is to encourage individual donations to charity. But is the current regulatory framework for Gift Aid the best way of maximising the amount of money that charities receive?
We used a survey-based approach to look at how donors would respond to possible changes to the way tax relief was delivered through Gift Aid. Our findings indicate that the amount of money going to charities could increase if tax relief were all directed at the charity rather than being split between the charity and higher-rate taxpayers.
The reasons for this are quite simple:
First, most higher-rate taxpayers do not reclaim the rebate, although bigger donors typically do and higher-rate relief is reclaimed on 80% of donations made by higher-rate taxpayers.
Second, most donors do not adjust their donations out of net-of-tax income to take account of tax relief. So, charities benefit fully from tax relief directed at them, and not at all from tax relief directed at taxpayers.
These findings need qualifying in a number of ways. First, some charities could lose out if Gift Aid legislation were reformed to redirect the higher rate rebate to charities, even if the sector as a whole were to gain, since the rebate is important to some higher-rate donors. Secondly, there are a number of issues around how to implement a scheme to increase tax relief directed at charities that our research did not consider and that will be important in practice – not least how charities themselves respond to the change.
Full Paper: this presentation is based on a detailed research report prepared for HM Treasury and HM Revenue and Customs. The full report entitled “Gift Aid donor research: Exploring options for reforming higher-rate relief” (same authors) is available at www.hm-treasury.gov.uk/d/gift_aid_reseach_report_091208.pdf