The Government spends more money incentivising donations than charities receive through the incentivised donations, researchers at a new independent Tax Centre have concluded.

Photo of donation

Scrapping the Gift Aid tax incentive and simply giving the money to charities would result in “substantially higher donations”, new research suggests.

Extensive independent study of 75 million self-assessment tax returns found that for every £1 the Government spends incentivising giving among higher-rate tax payers, 35p is generated for charity.

But the researchers warn the results do not mean Gift Aid should be abandoned, arguing the extent to which the incentive is effective depends on other contextual factors, such as the value of the ‘warm glow’ feeling felt by donors, which are unclear without further research.

“If you’re just looking at money, the research suggests it costs more to do this,” said Kimberley Scharf, Research Director of the National Audit Office – University of Birmingham Tax Centre, which conducted the research. “You might ask if we should cut Gift Aid because it doesn’t work – and the answer is no, because the incentive does increase donations.

“My hope would be this research generates debate about the best way to incentivise giving.”

Two branches

Gift Aid incentivises giving by boosting donations by 25% and allowing higher-rate tax payers to claim back a proportion of their donations on their tax bill.

A £100 donation becomes £125 with Government’s support through Gift Aid, and a higher-rate tax payer can claim back £25, meaning a donation worth £125 costs the donor £75 and the Government £50.

The research is based on 75 million self-assessment income tax returns covering the period 2004/05 to 2012/13, but did not include any of the 22 million people on payroll.

The study looks at the effect of the 2010 tax reforms, which further reduced the cost of giving for taxpayers earning more than £100k a year. The researchers found that Gift Aid mostly incentivised donors to give more, rather than encourage more people to donate.

Academic caution

Scharf is clear to avoid concluding Gift Aid is inefficient or ineffective, noting the current research doesn’t take into account whether the breadth of charities receiving donations has changed through Gift Aid-incentivised donations.

Similarly, it doesn’t assess the what the newly donated money is used for, the intangible value to the donor – a ‘warm glow’ – associated with donating, or the logistics of a Government choosing to distribute the value of the incentive directly to charities.

“This is the beginning of the conversation. The figures should be used to ground the debate,” Scharf added.

The research is one of the first pieces of work by the new independent Tax Centre established by the National Audit Office and academics at the University of Birmingham to guide tax policy and implementation.

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Comments

Many thanks for this piece but I do think that phrases such as "Government’s support" to describe Gift Aid are somewhat misleading. The basic premise of Gift Aid is that you should not pay tax on money that you give away for the greater good (ie, give to charity). Gift Aid is not a grant from the government but the return of the tax that the donor has already paid on the money they have donated. In America, the country much lauded here for the extent of its cultural philanthropy, all the tax relief goes to the donor (which rather implies it must work a bit!). Here, in part because of PAYE, the basic tax paid by a donor goes to the charity and any further tax paid goes back to the donor. If we start to separate, in word or thought, Gift Aid from the tax paid on the donation, it will morph from being directly and inextricably linked to money donated, to becoming a form of state aid, subject to European regulations and open to change by the Government of the day. Given the direction of travel on cultural spending by this government, I don’t think such a change will be in anyone’s best interests!