It’s nice to be nice: Payroll giving

Richard Curtis explores the ‘pros’ and ‘cons’ of workplace charitable donations. Generally, the UK tax system looks kindly on charitable giving, and encourages this through various tax reliefs. The most used is the gift aid scheme, whereby a donation to charity is made from taxed income, so that HMRC will then repay to the charity the tax ‘deducted’. So, a gift of £8 is treated as being a £10 gift from which £2 (i.e., tax at 20%) has been deducted. The charity can then reclaim the £2, receiving £10 in total for an £8 outlay. If the giver is liable to higher rates, further tax relief can be claimed.

Gift aid works well for one-off gifts, but donors might like to make giving a part of their regular expenditure (benefitting charities with a more regular income). The payroll giving scheme can help.

What is payroll giving?

Payroll giving (sometimes called ‘give as you earn’) enables employees to donate a sum from their salary to registered charities. The donation is deducted from pay by the employer before income tax is calculated. One of the primary advantages of payroll giving is this tax efficiency; donations are made from an employee’s gross salary, so the contribution is automatically tax-free.

For example, ignoring tax allowances etc., if an employee who is liable at the 20% basic rate of income tax earns £100, they will pay £20 tax, so they receive £80. If they donate £10 under payroll giving, they pay 20% tax on £90, i.e., £18, leaving them in receipt of £72. Thus, their £10 donation has cost a basic-rate taxpayer only £8. Higher and additional- rate taxpayers benefit even more; for example, the cost of a £10 donation to a 40% taxpayer would be only £6.

The agency

Payroll giving schemes must use an authorised payroll giving agency (PGA) to implement their payroll giving scheme. Approved PGAs are listed on the HMRC website (see tinyurl.com/PayGivAge), regulated by HMRC and are registered charities. The employer, having made a deduction from an employee’s pay, sends the donation to the PGA. The PGA then transfers these to registered charities in accordance with the employee’s wishes.

The PGA will make a small charge for this service, but the advantage is ease of use and once set up, the process is entirely automatic – employees do not have to manually transfer funds, fill out paperwork or claim on their tax returns because the correct tax relief has already been given.

Advantages

Employees can choose from thousands of registered charities, and some PGAs allow donors to split their contributions between several charities. The employee can still make additional charitable gifts to these or other charities through the gift aid scheme.

For employers, offering a payroll giving scheme demonstrates a commitment to corporate social responsibility. This can enhance employee morale and improve the company’s public image. The employer can use more than one PGA and might also wish to match employee donations. For the charity, payroll giving provides a more predictable and steady income stream.

Disadvantages

Despite their benefits, awareness of payroll giving schemes is low, resulting in low participation rates. A consultation in 2013 noted that only two per cent of employers offered payroll giving schemes, with just three per cent of the workforce donating through this mechanism.

A 2024 report by the Charities Aid Foundation noted the latest data showing that the number of employees using payroll giving had fallen by 13% since 2020 to just over half a million employees (out of about 30 million eligible employees).  Almost 60% of people had not heard of payroll giving.

Conclusion

Payroll giving seems to be an underused feature of the tax system. Employees might raise awareness with their employers, and vice versa. There may be benefits to both and to the charities, of course.

Practical tip

Employees do not have to tell their employer which charity or charities their donations are being sent to. Also, the PGA should not provide the charity with any information about a donor (name, address or employer) without the agreement of the donor.

Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.