Cathy Pharoah: tax break changes could mean jam today but bread and water tomorrow

The director of the Research Centre for Charitable Giving and Philanthropy on encouraging the wealthy to give

Major philanthropy has never been more important than in the current economic environment, as reflected in the recent appointment of a philanthropy ambassador by the Office of the Third Sector. But the winds of change are blowing major planned giving in different directions at the moment, and the sector does not appear to have a clear vision for its future.

Tax incentives work alongside other factors to motivate giving and affect the amount donated. Will the need to grow planned giving affect tax and regulatory policy? Or will it be the other way around: will tax policy and the current strain on the Government's tax revenues change the way we approach planned giving?

One significant proposal under consideration is that charities, rather than donors, should receive the tax relief on gifts that is currently paid back to higher-rate taxpayers. Removing this tax break makes it 'more expensive' for the donor to give, and could therefore reduce the size of gifts.

Some donors might be happy to continue giving at the same level, with the charity getting the extra. But counting on this is a risky strategy in a recession, when lower incomes might mean less to spend on giving.

The new 50p tax rate from April next year could have either positive or negative effects. It will reduce the donor's income, and might consequently reduce gifts, but it will also cut the cost of giving, because the value of the charitable tax break will be higher.

If tax relief on gifts were to go to charities rather than donors, it would have a positive economic effect only if donors saw it as a genuine cost reduction. Moreover, if the higher-rate taxpayer were to pass personal tax benefit to a charity, not all of the tax paid by the donor on the gift would reach the charity because government still pockets a small slice of the tax. If this change goes ahead, the share retained by government will actually increase, thereby raising the cost of giving.

Tax-effective giving from the wealthy provides the sector with about £4bn a year. Despite the importance of these donors, the sector appears divided between a simplistic view of the future of Gift Aid - where charities just want the cash - and more wary concerns about donor responses to change.

In the US, President Obama has proposed similar reductions in direct benefit to wealthy donors. In the UK, the fundraising lobby is supporting the proposal to direct benefit away from the donor. In the US, by contrast, the Association of Fundraising Professionals is already encouraging its members to lobby Congress against the new measures. Is the UK sector just looking for jam today, with bread and water to follow tomorrow?

FACT FILE TAX-EFFECTIVE GIVING

Total private giving in the UK from individuals (including legacies), companies and charitable trusts is currently worth about £16.5bn to the sector each year - more than a third of its total income.

Total individual giving in 2007/08 was valued at about £10.6bn. It is estimated that during a typical month in that year, about 27.7 million people gave to charity, compared with 26.8m in 2006/07.

Gift Aid was first introduced in 1990: £11m of tax relief was paid to charities in its first year, a figure that has grown to an estimated £947m in 2008/09.

Higher-rate taxpayers donated at least £1.38bn in Gift Aid to the sector, including tax paid back to charities, in 2007/08.

The value of the total personal income tax breaks given directly to higher-rate taxpayers in the UK in 2007/08 was £270m.

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