The UK has a complex tax system. Very large parts of it appear to be designed solely to assist the wealthy pay less tax. The result is that, overall, those on highest incomes in the UK pay no more tax as a proportion of their income than most do in our society, and may well pay much less as a proportion of income than those with the lowest incomes of all. This is why I have been writing a series on necessary tax reforms to tackle income and wealth inequality in the UK. In this context my next recommendation makes complete sense:
Abolish higher rate tax relief on gifts to charity
In 2012 George Osborne made on of his rare sensible tax reform proposals. He suggested restricting the tax relief available to any taxpayer on the gifts that they might make to charity to the basic rate of income tax. The result would have been that the higher rate tax relief on gifts to charity that those who pay the 40% and above tax rates now enjoy would be eliminated.
A brief explanation is required. When a person donates to a charity and claims gift aid the income donated ceases to be deemed theirs and becomes that of the charity. The charity can reclaim the basic rate of tax. An 80p donation gives rise to a 20p tax reclaim by the charity in that case.
But if the taxpayer pays tax at higher rates they can then reclaim the higher rate of tax, as the government explains here. This means that in the example given a 40% taxpayer can claim an additional 20p of tax back. The charity gets no benefit from that. Only the taxpayer does.
This makes no sense at all. I have explained why here.
What it does mean is that wealthy individuals can direct greater parts of government spending to causes that matter most to them. This is inappropriate. There should be equality on this issue, at the very least, and even then bias would remain as the wealthy have more to give. What is also inappropriate is that the relief does not go to the charity and there is very little evidence that wealthy donate more when they know this.
This relief has to go. It makes a mockery of the concept of charity.
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I am glad to see you are no longer claiming that when a 40% taxpayer make a £1 gift aid donation to charity, “For every £1 that they give to charity the government gives an extra 66p.”
As you say, when a person makes a gift aid donation, the charity claims back 20p for every 80p (or 25p for every £1), and a higher rate donor is entitled to claim back another 20p for every 80p (or 25p for every £1). That is because the gift is in effect treated as being made from pre-tax income, and the charity is claiming back the basic rate tax that has been paid by the taxpayer, and it is hardly surprising that the additional relief goes to the taxpayer. (There is an irony, that when the basic rate of income tax is reduced, the amount of tax that can be reclaimed by the charity decreases.)
Gift aid was introduced as a simplification measure – in the past, before 1990, you needed a deed of covenant to make donations over several years to achieve a similar result – and the amount of donations qualifying for relief (and indeed the value of donations overall) have increased substantially.
You say there little evidence that tax relief encourages charitable donations. I’d say it plainly does. No doubt the widow’s mite has great moral worth, but charities need money to do their good works, and I fear this change would leave them with less.
Charities have had beneficial tax treatment a very long time, and it seems a bit odd to complain that taxpayers claiming tax reliefs on charitable donations are somehow directing government spending. Charities are not government bodies, and in any event I thought public spending came before taxation, let alone tax reliefs. (Charities claiming relief from business rates – indeed business rates more generally – might be a better target…)
I am bemused
Where is the evidence that higher rate taxpayers adjust their donations for rac relief? HMRC have not found it
And I am not suggesting cancelling gift aid
And since tax spends (and this is a tax spend) direct government spending all that I say follows
I am really not sure what you are claiming here
OT but…… another slant on one of your favourite topics.
https://citywire.co.uk/wealth-manager/news/free-money-forever-adventures-in-mmt/a1261050
I note they did not ask anyone who knew about it
This would indeed seem to be a sensible change. I volunteer in a BHF shop and we deal a lot in Gift Aid, but we only see the extra 25% as you say. Our donations are of goods not money though the situation is slightly different.
But the donor can still claim higher rate relief if they pay higher rate tax
‘What is also inappropriate is that the relief does not go to the charity and there is very little evidence that wealthy donate more when they know this.”
Please can you link to the analysis that supports your conclusion?
This is pretty compelling
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/442559/Charitable_giving_and_Gift_Aid_behaviour_amongst_better-off_individuals.pdf
Most taxpayers do not understand the reliefs
So of course they do not adjust for it
That report says (that people say) that tax reliefs have little impact on their decision to make a donation, as it was not seen as a motivation in itself. But the report also says that tax reliefs do have an impact on donation behaviour. And that people place importance on their ability to claim the tax reliefs, even if they don’t actually claim them.
Primarily, people want it to be easier to claim the tax reliefs (eg not having to remember to keep notes until the tax return) , and higher reliefs for larger donations.
I believe the first
The second covers their later embarrassment
So if parents donate to their child’s school, to refurbish a gym, for example, the wealthy public school gets rax relief because it is a charity. Additionally the wealthy parents get tax relief too. Presumably as the gift that their child directly benefits from may be significant they would bother to make the claim. Whereas the poor State school parents donate from taxed income and get no relief.
In passing it is worth noting that a child at a fee-paying shool whose fees are paid by third parties (grandparents rather than parents for example) could be in receipt of Education Maintenance Allowance (now a bursary schem in England). Apparently this is not as infrequent as one might suppose.
It is perfectly possible for “poor state school parents” (and indeed wealthy state school parents, and ones in the middle) to make donations to a state school which qualify for gift aid, if a charity is set up to receive the donations. Many schools or PTAs organise a charitable school support fund for that reason, for example, https://www.hythe.surrey.sch.uk/parents/gift-aid
Similarly, poor parents of children at private schools (as almost all offer scholarships or bursaries). This is also this is not as infrequent as one might suppose.
So it is not a “rich versus poor” thing at all: as I understand it, the research tends to show that poor people give more to charity (in proportion to their income) than rich people.
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