At Work: Finance and IT - Taxation - Charities must join in the tax debate

Cathy Pharoah, a voluntary sector research consultant

As the main political parties flex their muscles on questions of personal taxation, from Stephen Byers' proposal to abolish inheritance tax to the Liberal Democrats' (now defeated) interest in raising the top rate of tax, what should the sector be looking out for?

Higher tax rates mean that tax-effective giving becomes 'cheaper' because charities get higher pay-backs under Gift Aid. Lower tax rates mean a lower pay-back. However, low taxes mean people have more money to give away.

The sector needs to have a watching brief on tax. The value of gifts through Gift Aid reached £2.6bn in 2005/06, with a further £728m paid in tax back to charities - a robust increase of 14 per cent on last year.

Charitable legacies are worth about £1.6bn to charities, and £380m in tax relief to estates in 2005.

The Conservatives favour a low-tax environment, but they're now cautious on change. But if, for example, the standard rate of tax was reduced by 1p in the pound, this could mean a loss of about £70m in tax reliefs paid back to charities. Giving would also 'cost' people 1p in the pound more, so they might actually reduce the amount they give through Gift Aid.

The Government has kept income tax at a steady level and increased access to charitable tax relief. Consequently, tax-effective giving has grown in spite of rises in National Insurance.

And what about the idea of abolishing Inheritance Tax? It is payable only on the 15-20 per cent of estates that represent about half the total value of all estates. Its abolition would make the cost of giving 'higher' and remove incentives to leave legacies.

At their conference, the Liberal Democrats defeated the idea of raising higher-rate tax to 50 per cent for earnings over £150,000. This may have been a missed trick for charities. For the 3-4 per cent of our richest higher-rate taxpayers who'd give about one-fifth of the value of all donations, the price of giving might have come down by 10p in the pound - this would have been offset against the donor's tax bill, creating an added incentive to give.

The Liberal Democrats are proposing lower standard-rate income tax and shifting the tax burden away from income to an increased 'green tax' on consumption, which might be less good news for charities.

Research in the US and the UK shows that the amount of giving is sensitive to its cost, although the data is incomplete on how much it is affected.

So as the debate on where tax burdens should fall progresses, the charity sector needs to raise awareness that changes may have an impact on its income.

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