Nearly 90% of charities are worried that the new cap on tax relief, being introduced in April 2013, will result in a drop in donations from wealthy individuals.
The tax relief cap was presented in the Budget last month. From 6th April 2013, the maximum amount of tax relief available each year will be limited to £50,000 or 25% of income if higher.
As a result of this tax relief cap being introduced, the Charities Aid Foundation says its members believe wealthy benefactors will donate less.
Will a 25% tax relief cap really result in fewer donations to charity?
Donations made to charities receive Gift Aid which allows the charity to reclaim basic rate income tax relief on your gift at the rate of 20%. Charities reclaim the 20% on the ‘gross’ amount of the gift, so the amount of the donation before basic rate income tax was deducted.
For example, if an individual donated £100 to a charity, that charity would be able to reclaim £25 of gift aid (20% of the ‘gross’ amount of £125).
You can only make a charitable donation using Gift Aid if the amount of income tax and capital gains tax you have paid in the tax year is at least equal to the amount of basic rate tax relief the charity will reclaim.
In the example above, the individual must have paid at least £25 of tax in the year of the donation for Gift Aid to apply.
Higher rate tax payers making charitable donations can also claim the difference between the higher rate of income tax at 40% or 50% (45% from next April) and the basic rate of 20% on the ‘gross’ value of their donation.
Using the example above again, the individual could reclaim a further £25 in higher rate tax relief if they were a 40% tax payer, as the 20% difference between 20% and 40% on the gross donation of £125 is a further £25.
This reduces the effective cost of giving a charity £125 to £75 for a higher rate tax payer. Someone paying income tax at the 50% rate would have higher rate tax relief of £37.50, resulting in an effective cost of £62.50.
The fear is that wealthy individuals will not want to make charitable donations from next tax year onwards if the amount of higher rate income tax relief they can obtain, at 40% or 45%, is capped and therefore unavailable on some donations.
We hope that this is not the case, as charities rely on large donations from wealthy people to carry out their good work.
What the Treasury could easily do is exclude donations made to valid charities from the tax relief cap next year. Based on the comments from those charities questioned by the Charities Aid Foundation, better understanding of the tax relief cap could also help to dispel some fears.
Photo credit: Flickr/HowardLake
