The Chancellor, Kwasi Kwarteng, has announced as part of his 'mini-budget' that the basic rate of income tax will be cut from 20% to 19% from 6 April 2023. (The previous Chancellor, Rishi Sunak, first announced the cut 6 months ago, but had planned for it to take effect from April 2024).
So what does this mean for the charity sector?
Currently, Gift Aid allows a charity or CASC (community amateur sports club) to reclaim an amount equal to basic rate tax on the amount of the donation, plus basic rate tax already paid by that taxpayer on that donation. To work out the figure, you need to "gross up" the amount of the donation. If we take a £100 donation as an example, the fraction applied to calculate Gift Aid is 100 x 20/80. This is 25% of £100 which equals £25 or 25p for every £1 of donation received.
With the reduction of the basic rate to 19%, the amount that could be reclaimed on eligible Gift Aid donations will be only 23p* for every £1 of donation received. This may sound like a small reduction but charities rely heavily on Gift Aid and the change would result in a significant drop for charities; according to HMRC’s data, Gift Aid was worth £1.34 billion to charities in 2021/22.
The good news for charities is that the UK Government has confirmed there will be a transition period for Gift Aid relief, so that the income tax basic rate relief at 20% will be maintained until April 2027. It is intended that by April 2027 the rates will again be aligned. To illustrate, a £100 Gift Aid donation today would result in the charity receiving £125. After April 2027 we can expect the same £100 donation to amount to a £123.46 receipt.
We await the details of this in a forthcoming Finance Bill.
*Strictly speaking, 23.45p