The Charities Aid Foundation has called for reforms to improve the take-up of payroll giving.
A report, Insights Into 25 Years of Payroll Giving, published by CAF on Monday, shows that only 3 per cent of employees give to charity through the scheme. In 2011/12, £118m was given to good causes by 735,000 people through the payroll.
But only 1.9 per cent of employees under 30 give through the scheme, compared with 4.5 per cent of those aged between 30 and 49, the report found.
Under the scheme, employees can arrange for their employers to make charity donations from their gross pay before tax is deducted.
The report recommends that the government, employers and charities should work together to increase the use of payroll giving by young people and those on lower incomes. It calls for both the government and employers to match employee donations through the scheme as an incentive.
CAF has urged the government and the voluntary sector to work together to streamline payroll giving through technology.
The report analyses trends in payroll giving from its launch in 1987 to 2012.
According to CAF, the report shows that reforms are needed to make payroll giving schemes fit for the internet age and achieve the growth found at the start of the new millennium: between 1999 and 2003, the amount raised through payroll giving rose from £42m to £115m. The report puts this down to various government-backed campaigns to encourage payroll giving and says since then there has been "little innovation", leaving donations relatively flat.
Hannah Terrey, head of policy and campaigns at CAF, said: "Payroll giving has massive untapped potential to encourage people to make a regular contribution to the causes people care about.
"Many major companies and their staff take advantage of this means of giving, but we need to do more to encourage millions more to give. We need to recruit a new generation of employees to get into giving as they earn so they can build long-term links with charities and experience the joy of supporting a cause they care about.
"There is huge potential to expand the numbers of people giving direct from their salaries. The massive increase in people signing up a decade ago shows what can be achieved."
The government is due to launch a consultation on payroll giving to look for new ideas to reinvigorate the scheme.