Charities face losing over 75 million per year from April 2008, as a result of the reduction in the basic rate of income tax from 22% to 20%, announced in the Budget.
Charities recover basic rate tax from HM Revenue and Customs when donors give money under the Gift Aid scheme this provides some 750 million per year of income.
A charity receiving a 10 donation will currently receive a gift aid refund of 2.82. However, from April 2008, the same donation will attract a refund of only 2.50, meaning that charities could miss out on millions of pounds if donations are not upped accordingly.
Bill Dodwell, tax partner at Deloitte, says: “The difficulty of course is that many donors give a round sum, such as 10. It will be tough to get the message across that to leave the charity (and the donor) in the same position, that 10 donation will need to be increased to 10.26.”
Charities will need to educate donors that they can increase the cash donations they make at no cost to themselves.
An individual who earns, say, 100 will have 78 left after basic rate tax. If he gives that amount to a charity, the charity will end up with 100, taking account of the gift aid refund of 22.
From April 2008, the same individual will get 80 after basic rate tax and if he gives 80 to the charity, the charity will still end up with the same 100, after the reduced gift aid refund of 20.
Pesh Framjee, head of Deloitte’s charity practice, adds: “For many charities, gift aid tax refunds could be worth over 10% of their voluntary income.
“The reduction in basic rate income tax will reduce the gift aid refund by about 11 per cent. Charities will see a fall in their income unless donors increase their donations from April 2008.
“A similar point arises for higher rate taxpayers but since the 40% tax rate is unchanged, the same donation will actually cost the donor less, from April 2008.
“A 100 donation under gift aid currently gives a charity 128.20 and costs the donor 77, since he claims higher rate tax relief of 23 through his tax return.
“From April 2008, that 100 donation will give the charity only 125, whilst costing the donor only 75, through increased higher rate tax relief of 25 (40% less 20%, instead of 40% less 22%).
“Charities and sports clubs will welcome the increase to the benefits given to donors in respect of donations over 1,000, while still allowing the donation to qualify for gift aid tax relief.
“This will particularly benefit community amateur sports clubs and other charities offering membership benefits. The new limits, which will apply from April 2007, will be 5% of the donation of 1000 or more – at least 50, instead of the current limit of 25.
“Nonetheless, the financial impact of this change is tiny, compared with any possible loss of income under gift aid.”