All you need to know about Payroll Giving

Payroll Giving provides a way for you to make donations to charity from your wages or pension before it is taxed. Donations are paid directly to the charity of your choice through your employer’s Pay As You Earn (PAYE) scheme. That means that, once set up, your donation is taken out of amount you receive every month from your employer and given to the charity. You only pay tax on what is left.

 

 

Information for donors: the benefits of Payroll Giving

 

The biggest benefit of Payroll Giving is that your donations are magnified. For every one pound that you give, your chosen charity receives more than one pound. That’s because the tax you would normally pay on that one pound is given to the charity. It’s very similar to the way that Gift Aid works.

 

But here’s a crucial difference: Gift Aid only allows charities to claim an extra 25% from the government on your donations. But with Payroll Giving, charities benefit from an extra 40% if you are a 40% taxpayer, and 45% if you pay the highest rate of tax.

 

Let’s say you want your chosen charity to receive £10 every month. If you pay 20% tax, then your salary will be reduced by £8 per month.

 

But if you are a 40% taxpayer then your salary will be reduced by just £6, with the charity still receiving £10. And if you are a 45% taxpayer then a £10 donation will cost you just £5.50.

 

In short, Payroll Giving is a very tax-efficient way to make donations to a charity, especially if you pay more than the 20% basic tax rate.

 

There are two more benefits of Payroll Giving worth mentioning. Firstly, it is a very easy way of donating to your chosen charity, because once it has been set up there is nothing more you have to do. But if you wish, you are free to increase or decrease your monthly donations at any time, cancel existing ones, or initiate new ones.

 

Secondly, some (but not all) employers who have Payroll Giving schemes offer to match your donations with donations of their own. That means that, subject to some limits, the donations that your chosen charity receives are doubled.

 

 

Information for charities: how charities benefit from Payroll Giving

 

One of the key benefits to your charity is that Payroll Giving provides you with a regular and reliable income stream, which allows you to plan ahead and use the donations efficiently. It is true that donors can stop their payments at any time, or payments can be interrupted if a donor changes employer, but with a large group of repeat donors the total income your charity can expect to receive from Payroll Giving is unlikely to vary significantly from month to month.

 

But the biggest benefit is the extra tax that can effectively be reclaimed from higher rate taxpayers. As mentioned above, Gift Aid only allows your charity to reclaim 20% tax on donations, irrespective of the rate of tax a donor actually pays. But Payroll Giving allows your charity to reclaim the full amount that some donors pay – either 40% or 45% –  providing a significant extra boost to your charities’ fundraising efforts.

 

One further benefit is that donations made through Payroll Giving are easier to manage. That’s because your charity may receive donations from hundreds or even thousands of individual employees from different companies every month, but these donations will be lumped together so you have to handle a far smaller number of payments.

 

 

Rules that your charity must be aware of

 

In order to receive Payroll Giving donations, your charity must be recognised by HMRC. In addition, you must use Payroll Giving donations for charitable purposes.

 

One final point to mention is that your charity can’t claim Gift Aid on Payroll Giving donations, because the tax can only be reclaimed once.

 

 

How does Payroll Giving work?

 

To get a Payroll Giving scheme up and running, the first thing is for an employer to contact a Payroll Giving Agency who will set up the scheme. The government maintains a list of approved Payroll Giving agencies.

 

Once the scheme has been set up, the employer makes deductions from employees’ salaries each time the payroll is run. Donations are taken from employees’ pay before tax, but after National Insurance has been deducted.

 

The employer then sends the donations to the Payroll Giving agency, and that organisation forwards the donations to the chosen charities. Agencies may charge an administration fee, and often this is deducted from each employee’s donation before being passed to the charity. Some organisations choose to pay the administration fee, so that more money is sent to the charity.

 

For employees working for an organisation which already has a Payroll Giving Scheme, joining the scheme should be as simple as contacting someone from the human resources (HR) department. For employees at organisations which do not have an existing scheme, the way forward is to talk to someone from HR about setting one up.