The government has been facing an onslaught of criticism in the last few weeks after all the revelations from their Budget. One of the most controversial measures is the charity tax relief cap – a change in the amount of tax relief that people can receive when donating money to charity.
The Charities Aid Foundation (CAF) says that Britain is the fifth most generous nation when it comes to charitable donations – something we can be proud of. But there are fears that the government’s new measures will discourage this philanthropy and leave charities out of pocket.
So what exactly is changing?
Currently when you donate to charity, the charity can use the Gift Aid scheme to claim back the tax you would have paid on that money – so for every £1 you give, the charity can get £1.25. And for those who pay a higher rate of tax, they can also claim back the difference between that and the basic rate, in what is known as tax relief.
The change, which is set to come into force in April 2013 will see the tax relief capped at £50,000 or 25% of annual income.
Why has the government decided to do this?
The government has argued that some wealthier members of our society give large donations to charity as a form of tax avoidance, and that this proposed cap will prevent that from happening.
What does this mean for those making donations?
For the majority of people donating to charity this change won’t make a huge difference, since most of us just give a few pounds a month or the odd donation here and there. But for the real philanthropists who give regular large donations to charity, it could make a very noticeable difference.
With current tax relief those donating millions of pounds to charity will receive hundreds of thousands back in tax relief from the government, but when this new cap comes in, that amount will be substantially reduced. Which some argue is penalising charitable giving.
Since nearly half of charity donations come from just 7% of donors according to CAF, this acts as real discouragement for those people to keep up their generous donations. Of course there are some who try to abuse the system in order to pay less tax, but few think a blanket cap is the answer to this problem.
What will the change mean for charities?
Of course if fewer people are inclined to donate, charities will be left worse off. But it isn’t just that. The reduced tax relief effectively means larger donors will pay more to make the same donation (because they won’t get as much tax back) so if they reduce their donation to account for this loss of relief, the charity will receive less money from the government in Gift Aid too, leaving it even worse off.
It’s worth remembering too that even some of the biggest charities out there – like Cancer Research and Oxfam – rely entirely on donations from the public, so these changes could make a real dent in their coffers.
And what sort of message does this send to the population as a whole? That giving to charity is effectively tax avoidance? That philanthropy is not welcome? It seems to me that there are a myriad of ways for the government to target tax avoiders, but this one should certainly not be at the top of the list.
{Image: Tax Credits}
