Payroll Giving and Gift Aid

Payroll Giving is an easy and tax-effective way to donate money to charity. Donors can give to any charities they choose directly from their pay or from their company or personal pension.

Charities appreciate receiving regular donations as it makes it easier for them to budget; and donors benefit because the money is taken from their earnings or pension before tax is worked out so they pay less tax.

Employees ask their payroll department to take donations from their gross pay, before calculating PAYE but after National Insurance Contributions. If an employee is a basic rate taxpayer, giving £10 only costs them £8, because they save £2 tax (20 per cent of £10). A £10 donation would only cost a higher rate taxpayer £6. The employer sends the money to an HMRC-approved Payroll Giving Agency. These agencies run the scheme on behalf of employers and pension providers and are themselves charities. They forward the money to each charity as requested, usually taking a small administration fee. Sometimes employers pay this fee so the charities receive the full donation.

Gift Aid

When a UK taxpayer gives money to a charity or Community Amateur Sports Club (CASC), they have already paid tax on that money. Because charities are generally exempt from tax, they can reclaim basic rate tax on the donation. This repayment, made by HMRC, is known as Gift Aid.

The donor makes a Gift Aid declaration, usually by filling out a simple form, giving permission for the tax to be reclaimed.

The basic rate of Income Tax is 20 per cent. This means for every £1 qualifying donation received, the charity or CASC can claim repayment of 25 pence. So if Emma gives £10 to her favourite cat charity using Gift Aid, the charity actually gets £12.50.

To use Gift Aid, the donor must pay at least as much Income Tax or Capital Gains Tax as the amount being reclaimed, usually in the same tax year, and only UK tax counts. For every £1 donated between 6 April 2008 and 5 April 2011, the charity or CASC will also get an extra three pence transitional relief. This is provided by the government to give charities time to adjust to the two per cent reduction in basic rate tax since 6 April.