Tax & Charities…what’s going on?

So issues from the Budget are still rolling on…now it’s the world of tax reliefs.

Charities are upset that they’re going to lose out, people are angry that the politicians could stoop so low, and the Treasury are, by all accounts, wanting to stick to their guns.

So what’s the issue?

The issue is tax reliefs. The idea is simple, and we’ll start with a simple example, my own business.

As a sole trader, I receive money from my business each month. Some of these “drawings” I then spend, not on treating myself to new clothes and Doctor Who DVDs, but on things for my business – petrol to get to teaching, stationery for business stuff, and extra electricity incurred at home when I write my lesson plans, for example.

Someone then says “Okay, when I pay myself money from my business, it’s right I should pay Income tax on it – it is, after all, income. However, it’s not fair that the share of income I then re-spend on my business should also be taxed. Because it’s not my income, I re-spend it on my business!”

Therefore, HMRC allows ‘tax reliefs’, so I can claim back the tax I paid when I withdrew my drawings on the amount I spent on my business. There’s a strict list on things you can reclaim tax on. One of these things is charitable donations, another is losses on a business.

The problem has arisen because, allegedly, many of the country’s richest have been manipulating these rules to reduce their tax bill to near £0. So this budget created a maximum amount one can claim relief on 25% of their earnings, or £50,000, whichever is the greater. So as an example, if one day my martial arts empire took over the world, and I drew down £100,000 every year, then spent £30,000 on fuel, stationery and sweets for my students, I could only reclaim the income tax I spent on the first £25,000 of that, the other £5,000 I would have to spend on my taxed income.

What happens if you are rich and donate a large chunk to charity is that you could previously claim back the tax on that amount. So if I donated £1m to charity, that’s £1m of income I don’t have to spend tax on. Based at a tax rate of 45%, on a simplistic sense that could be £450,000 tax bill I’ve just saved myself. Now, I’d have to earn at least £4m a year before I can claim back my £1m charitable donation tax-free.

The issue here is that charities are concerned that their rich donors (of which many, many charities rely) are going to donate less, based on the amount of relief they are able to claim.

The simplistic counter-argument is that people should donate to charity, irrespective of if their income is taxed or not. After all, when we put 20p in the charity jar held by that nice girl outside Tesco, that’s 20p we’ve earned in wages, and thus we’ve paid tax on that. But when the amounts of extra tax the rich have to pay is going up by hundreds of thousands of pounds, you can see why charities and the rich are, at the very least, having to think through the consequences of this.

On a personal note, I completely agree with the policy. With Gift Aid allowing charities to reclaim the tax we’ve paid anyways, I do not see the need why a charitable donation should be a tax relief. I have never reclaimed any of my charitable donations on my tax returns. Much as I begrudge paying taxes, I pay my fair share for hospitals, schools etc., then decide how much of what I have left I can donate to charity.  I think, if we are truly meant to be all in it together, so should the wealthiest in the country. As such, I think this government policy is sensible, and I wish more people would stand up and explain the virtues of this beyond “It will cut down on tax avoidance”.

However, I cannot help but understand why some people are nervous about this. I guess we’re about to find out the true motives as to why so many of the wealthiest people in this country donate to charity.

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