Tuesday, 17 April 2012

Higher Tax Bands

Gift Aid for higher tax bands

The current (April 2012) position with respect to Gift Aid is (I believe) as follows. For those who only pay 20% tax, the Inland Revenue makes a contribution to the charity that is equivalent to the donor making the donation before their tax liability is calculated. If I donate £100 the charity is given £25 extra. This is because when I earnt my money in the first place, the Inland Revenue took some in tax. I earnt £125, gave £25 to IR and £100 to the charity, whereupon IR gives the £25 to the charity.
For those who pay 40% tax, Inland Revenue DOES NOT make a proportionately larger contribution to the charity. If £100 is given out of taxed income, the donor would have had to have earnt £167 (and paid £67 in tax). To play level the Inland Revenue would give the charity the £67. Instead it gives the charity £25 and returns a portion of the remaining £42 to the donor. In the words of  HM Revenue and Customs:
"If you pay higher rate tax, you can claim the difference between the higher rate of tax 40 per cent and the basic rate of tax 20 per cent on the total 'gross' value of your donation to the charity. For example, if you donate £100, the total value of your donation to the charity is £125 - so you can claim back:  £25 (i.e. £125 × 20%)".
Mysterious!  There must be a White Paper somewhere that justifies this arcane system. To guess at the justification we suppose the tax efficient donor will see this as a way of clawing back some of the money he lost in tax; his eye is not on the charity, and giving is not his aim; his eye is on his own money. If he gave nothing his tax rate is 40% and he loses £67 of his £167 to the tax man. If he gives £100 to a charity the tax man rebates £25 to him and give the charity an equal amount. He writes a cheque for £100, but it costs him only £75 and benefits the charity £125. This incetives the donor. Furthermore, it is so complex that a considerable number of 40% (and 50%) tax payers neglect to claim their rebate, so the Revenue benefits by the complexity. 
On the other hand there is certainly a research paper from 2009 that reccommends a change (http://www.cgap.org.uk/uploads/seminar_15thDec Gift Aid.pdf). This was commissioned by HM Revenue and Customs on behalf of HM Treasury and examines the effect on donations of possible changes to Gift Aid. It argues that it is more efficient to focus on the charity rather than the donor, and suggestes that the 40% (or 50%) tax payer gets no rebate while the charity gets either all or a larger portion of the tax.  Getting all the tax would be simplest, and the easiest to justify.

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