I think we have now nailed down the way HM Revenue & Customs thinks its new cap on tax reliefs will work. Firstly, the relief is based on the level of your gift, not the level of tax you paid on that gift. So as soon as your gift hits £50,000, or a quarter of your income, you’re capped.
Secondly, that limit is taken to include Gift Aid. So if you earn less than £200,000, and give £40,001, and the charity claims Gift Aid on that, you’ll be capped.In addition, the donor is likely to be extremely limited in the amount of tax he can personally reclaim, because Gift Aid is subtracted from the amount a donor can claim back, and furthermore, it gets deducted before the donor gets anything.
For simplicity’s sake, let’s look at a donor who earns exactly £2m. If he gives £800,000 to charity, the charity can claim £200,000 in Gift Aid. For tax cap purposes, he is considered to have given £1m to charity.
Under the new rule, he is only allowed to claim tax back on £500,000, a quarter of his income. Next year, a donor would pay £225,000 tax on that, so that is all he can reclaim.
Because the charity has claimed £200,000 in Gift Aid already, the donor is only entitled to claim back another £25,000, because Gift Aid is subtracted from the amount the donor can claim back.
If he gave much more than that, he would not have paid enough tax to cover Gift Aid. HMRC appears to have no clue, at present, what would happen in that scenario.
Let’s look at how this compares to the current situation.
This year, if you earn £2m, and give £800,000 to charity, you get £300,000 tax relief, and the charity gets £200,000. The cost to you is £500,000, and the charity gets £1m.
If next year, you want your gift to cost you the same:
You give £580,000. You’ll be able to claim back £80,000 tax, and the charity will get £145,000 The cost to you is still £500,000, same as last year, but the charity gets £725,000 instead of £1m. Each pound you donate costs you 38 per cent more.
If next year, you want the charity to receive the same:
You give £800,000, like last year, but instead of getting back £300,000, you’ll get back £25,000. The cost to you is £775,000 instead of £500,000, and the charity still gets £1m. Your donation costs 55 per cent more.
(In the interests of full disclosure, the change above isn’t all caused by the tax cap. The highest rate of tax has changed from 50 per cent to 45 per cent, so your cost of giving would have gone up a bit anyway.)
Let’s look at what would happen if the price of giving went up in the same way for an ordinary guy earning the average wage who wants to sponsor a mate to run a marathon:
This year, if you give £10, the charity can claim Gift Aid. Total receipt for the charity: £12.50. Next year, you give the same £10. Now, the government says, the charity won’t get that Gift Aid, plus it will charge the charity another 94 pence. You still give £10, and the charity gets £9.06. You decide you want the charity still to get £12.50. You now have to give £15.50 for the charity to get £12.50.
In this scenario, would you give a bit less, or would you decide not to bother giving in the first place? I know what I’d do.
Also, if I was the marathon runner, I wouldn’t bother running. If I was the charity, I’d shut down the marathon fundraising department.
I dare say it’ll be the same for many major donors.
A fair number of people will not just give less, but not bother at all. There are a lot of other things to spend cash on, and there will be a Labour government along in a few years which will scrap this measure.
In the meantime, a few people will think to themselves, forget this generosity lark – I’ll buy myself a yacht.