subject: The Impact Of Tax Changes On Charities [print this page] Since the budget there has been some controversy over the impact of the changes in tax law on charities. Changes have been proposed whereby there will be a cap on the total amount of tax relief an individual can claim each year. The proposal calls for this to be capped at 50,000 or 25% of someones income.
Is the Government Attacking Charities?
The government is not attacking charities as these changes are not intended specifically to impact them but to impact other forms of tax relief and those who attempt to reduce their tax bill to as little as possible. Charities, however, have been caught up in this as donating to charities is one way in which some are able to reduce the amount of tax they pay. The potential impact on charities has become the headline story with many charities claiming they will suffer. They fear that some people will have less of an incentive to donate to good causes.
How can Donating to Charity lead to Paying Less Tax?
Charities are able to claim gift aid on donations. They can claim back the basic rate of tax that has been paid on the amount of the donation. This is 20%. Someone earning the basic rate of tax would have paid 20% in tax on everything they have earned above the personal allowance. A charity is able to claim this amount back in the form of gift aid. Higher rate tax payers, though, pay 40% tax on earnings above the 40% threshold. With 20% going to a charity in gift aid these tax payers can reclaim another 20% back, meaning they effectively pay less tax. This has led to the suspicion that some increase donations to charity to avoid paying tax, or to pay less tax. They arent personally better off by doing this but they are choosing where their money goes. They are able to give to a charity of their choice rather than pay it to the government in the form of taxation. They decide how it is spent, meaning the government doesnt.
What are the Reasons for this Proposed Change?
The reason for this proposed change is simple: to prevent some from not paying tax and lead to more overall funds being received through taxation. The real target is other tax breaks, such as through business expenses, but charities fall under the same law.
Reasons against these Changes
It appears that many do not agree with these proposals. It is feared that some may donate less to charity as there is not as much of an incentive. This wont impact the majority of donations (as the majority of the population are not higher rate tax payers) but it could impact larger donors. Some may give less as, in effect, it is costing them more or saving them less, depending on which way you look at it.
Will this really have an Impact?
It is difficult to predict the real impact this could have. If some are donating to charity to avoid tax then there could be a negative impact on charities. If people are donating for the right reasons, though, it could be argued it will not and donors will continue to give at the same levels. It will only impact higher rate tax payers but the largest donations do make up the majority in total money received by charities.
