Research Briefing Charity Tax Review: Summary of Research Findings
Stimulating a culture of charitable giving through tax reliefs
Charitable giving by the general public is a major source of income for the voluntary sector, accounting for up to a third of total income. Evidence from several recent sources has shown that there has been a long-term decline in participation in giving, especially amongst the young, although there is some evidence that this decline may be levelling off.
The Government has stated its intention to create a new `giving age', and, as part of this initiative, is seeking to make the tax system `more modern, flexible and simple' for donors and charities. In its consultation document, Review of Charity Taxation, March 1999, the Treasury put forward a number of proposals to the existing tax incentives to encourage people to give to charity, generally referred to as `tax-effective giving'. The proposed changes to tax-effective giving are intended to contribute to the creation of a widespread culture of giving (see back page for details of the existing tax incentives for giving).
The proposals included:
- Reducing the minimum limit for Gift Aid donations
- The facility to make Gift Aid donations in instalments
- Increasing or removing the maximum limit for Payroll Giving donations
- The facility for employers to distribute Payroll Giving donations directly to charities, without using a Payroll Giving agency
- A campaign to promote Payroll Giving, backed by a 10% supplement on donations, paid by the Government to charities
- Possible new tax incentives, including basic rate tax relief on donations going to the donor instead of to the charity
The consultation document acknowledged the need for further research on these proposals. In response, CAF (Charities Aid Foundation), the Inland Revenue (IR) and the National Council for Voluntary Organisations (NCVO) set up a joint research programme to assess the likely impact. Knowledge and understanding of the current tax incentives and motives for giving and barriers to giving were also studied in order to be able to effectively promote awareness and take-up of the tax reliefs.
This paper summarises the results of the extensive and wide-ranging research programme that was carried out. Further details of the research programme and how further information can be obtained are set out on the back page of this document.
Current patterns of charitable giving in the UK
Participation in giving
- 67% of the population gave to charity in the course of one month (July 1999) by all methods. These individuals are henceforward referred to as `givers'. Givers tend on the whole to be older, more affluent, and are more likely to be women, as compared with the general population.
- Tax-effective giving is currently confined to about one-tenth of the population.
Use of tax-effective giving
- The proportion of the population giving by the different tax-effective methods are:
3% Payroll deduction
0.6% Gift Aid
0.2% Millennium Gift Aid1
- Covenants are generally preferred by older, higher income individuals, payroll givers are spread across all age-bands with a majority in the 35-44 group. Whilst Gift Aid use is confined to those over 35 years of age, Millennium Gift Aid is largely taken up by its target audience - young people, the lowest paid and the oldest in the sample, though overall uptake is low.
Patterns of giving
- 17% of givers in the survey said they would prefer to give on a regular monthly basis. This is considerably higher than the proportion of the population who currently do so (approximately 10%), suggesting that there is some scope for extending regular giving, particularly in relation to higher incomes and social class bands.
- The youngest and oldest individuals are least likely to want to commit to regular giving. The most popular method of donation amongst younger lower paid individuals was spur of the moment street collections. Although the majority of respondents had bank accounts, they had not used direct debits or standing orders for charitable giving, and said they did not intend to do so.
Ease of giving
- Almost two-thirds of givers (64%) felt that the ease of giving (e.g. the amount of paperwork involved) was important or very important to them. There was some indication that this was slightly more important to young people, or to those with high incomes who might be making greater current use of tax- effective giving schemes.
Methods of non-cash giving
- The general population's preferred methods of giving by any non-cash method tended to follow a somewhat `traditional' pattern:
12% direct debit or standing order
11% postal orders
8% credit or debit card
6% payroll deduction
4% via the Internet
- Although the current use of on-line giving is limited - only 1% of givers had actually made a donation via the Internet - 33% knew that this was possible, and 77% have easy access to the Internet (mostly younger and wealthier people). While 92% said they would be unlikely to use the Internet in the future, younger people were considerably more likely than older people to say they would use it.
Awareness and understanding of tax-effective giving methods
- Although only 9% of the population use tax-effective giving methods, 43% of the general population are aware of the fact that there are tax-effective ways of giving to charity.
- Young people and those earning less were much less likely than older people to know about tax-effective giving schemes. In fact about three-quarters of those who did know about tax-effective schemes earned over £35k.
- Understanding is also clearly a problem for about one-quarter of the population; this consists of 13% who do not know how to donate tax-effectively, and 11% who think it is `too difficult'.
- There is considerable evidence, that those already involved in committed giving have a much better understanding. Amongst existing payroll givers, the tax benefit influenced 79% in joining the scheme, from all age and income bands, which shows how the knowledge gap can be overcome where individuals are directly initiated into schemes.
- 83% of individuals in the higher income survey were aware of tax-effective giving to charity, and of these 60% had used tax-effective methods.
- In spite of this, only half of the high earners (48%) could actually name any tax-effective schemes, and there were several misunderstandings of the application of tax reliefs within the various schemes.
Do tax incentives motivate people to give?
- Focus group discussions suggested that in deciding whether to give or not, givers are more guided by the cause they are asked to support than by considerations of tax-effectiveness or other concerns. Individuals are divided between those who favour a high level of involvement in their giving and those who want giving to be quick, easy and low profile.
Attitudes to using tax-effective schemes
- Although basically in favour of tax-effective giving, people have some misgivings about its perceived impersonality, perceived costs, and whether it might influence Government to raise taxes or cut services.
- Although some people had expressed a preference for regular giving, when asked why they did not use tax-effective schemes 7% of the general population sample said they did not want to commit to regular tax-effective giving, as they preferred to give spontaneously. 6% said they could not afford it, and 3% did not give enough money for it to be tax-effective.
- Despite this, almost half of the sample of givers (49%) felt that it was important or very important to give donations that are tax-effective to charity. These attitudes were concentrated among higher social classes and higher income groups, although there did not appear to be an age effect.
- Only half this proportion (23%) felt that it was important or very important to them to be able to reduce their own tax bill by giving.
- One-third (33%) of givers said that they would be very or quite likely to use tax-effective methods in future. Likelihood of future use is more likely amongst younger and more affluent individuals.
- In order to make a tax-effective donation 42% of givers were happy to fill in paperwork and send off a form with their name, address and confirmation of their tax status, 19% were happy to do this by telephone, and 5% were happy to do this through the Internet.
Younger People - how they give and why they don't give more
- The small sample of interviews with younger, lower income earners revealed that lack of disposable income, a desire to spend all the money they earned on themselves, and a feeling that charities lacked relevance to their own experience, were all advanced as reasons why young people donate less to charities than other age groups.
- The younger, lower earners felt that charity advertisements should be targeted more to give information and feedback about how the money is used, and information should be made more relevant and exciting to young people if charities want to attract them to donate more regularly.
Use of tax returns for donations
- One-third of the higher income sample thought that a reminder on the tax return would encourage more giving, and a further 23% thought it probably would.
Donor tax benefits
- Just under one-quarter of the sample thought donors would give more if the benefit went to the donor (as in the US), but more than half of these would not donate the additional 30% needed to compensate charities for the loss of tax benefits entailed in such a system.
Lowering the threshold
- 16% of all givers already give £100 or more to one charity in an average year, either in a lump sum or a number of smaller gifts, but not using the Gift Aid schemes. These givers tend to be older and more affluent.
- The percentage of givers willing to give a lump sum donation via the existing Gift Aid scheme if the lower limit were set at £100, was 12%.
- If the level were set at £50, the percentage who say they would use Gift Aid more than doubles to 27% amongst givers.
- If the level were set at £20, the percentage of givers more than doubles to 56%.
- The ability to pay in instalments did not appear to be an incentive to most. Only an additional 7% of all givers said that they would be likely to give £100 in instalments. This proportion fell to 3% at £50, and reverted to 7% for £20.
- The evidence suggests that a reduction of the Gift Aid threshold would appear to be attractive to considerably higher proportions of people than currently use the scheme. The introduction of an instalment facility was not particularly attractive, although this may be to do with misunderstandings around the term itself. And while some people may not need to give in instalments, there was some evidence that the younger, lower paid individuals might find instalments easier for them than a lump sum donation.
- Additionally, there is some evidence that the lower Gift Aid limit would cause a certain amount of new money to be donated to charity. While half of the general population were unsure, almost one quarter (24%) of givers thought that use of an extended Gift Aid scheme would not affect their other giving habits.
- The interest in the dropping of the tax-effective thresholds expressed, however, needs to be considered in the context of the general lack of understanding the tax-effective giving schemes and their rules.
Use of Payroll Giving
- Payroll Giving continue to increase each year with 1997/98 showing a 22% increase in receipts on the previous year. This is the highest level of growth since 1992/93 and may in some part be due to recent professional promotional campaigns.
- Despite the continuing growth, Payroll Giving still has a relatively low take-up with 1% of employers and 2% of employees participating. However, unlike other tax-effective giving schemes, Payroll Giving attracts a large majority of low-income earners, and a large number of small donations.
- The tax benefit was important to almost 80% of employees, whether giving large or small donations, when deciding to join the scheme. Only 28% of lower givers use additional tax-effective methods of giving compared with 62% of higher givers. This reflects the importance of this form of giving to the lower-income donors who tend to make lower donations. It is the main way in which they can receive a tax benefit.
Raising or abolishing the £1200 per year maximum
- The level of people's Payroll Giving related to the likely impact of changing thresholds. For example, 73% of higher payroll givers said they would be likely to increase their payroll donations if the limit was lifted or abolished. Conversely, 89% of lower payroll givers would not change their level of giving if the limit were altered.
- Although 58% of higher payroll givers say they would not give less by other methods if the limit were abolished or raised, a substantial minority of 42% say they would.
- Both employers and charities felt the maximum limit should be abandoned, and many thought there was little point to thresholds at all as so few payroll donors (1%) give at the limit.
- There is a certain amount of confusion about actual value of the current threshold, with some respondents saying they were giving at the limit, when in fact they were giving less. This may be because when previous limits have been raised, donors were unaware of the changes.
A supplement on donations for Payroll Giving
- A 10% supplement on donations was expected by 88% of payroll givers and 49% of the general population to encourage or probably encourage people to give more to charity. IN focus groups, employers and charities would welcome the extra 10% on payroll donations, although generally they thought it could be better used for extra publicity and promotion.
- Young people generally thought a 10% supplement by the Government to be a good idea, although few felt it would encourage them specifically to join a scheme.
Agency charities and choice
- One of the proposals in the consultation document was whether employers should be able to deal directly with charities, without the use of an agency charity to process the payroll donation. This might involve restricting the range of charities to which donors can give.
- In focus groups, the role of the agency charities was much appreciated by employers. Neither employers nor charities saw any particular benefit in changing the way Payroll Giving schemes are administered.
- Charities opposed the proposal to allow companies to deal directly with them, as they felt it would mean extra administration and costs for them, and for companies. Small companies in particular would find this hard.
- However, 98% of payroll givers thought that freedom of choice about which charity they could support was important. This was reflected in the fact that 63% said they would not have joined the scheme if their choice had been restricted.
- Young people especially felt it was very important to be able to choose the charity to support; they did not want their money going to causes they did not like or approve of.
Promotion and awareness of Payroll Giving
- Employers, charities and donors alike, felt that lack of knowledge and understanding of the scheme was inhibiting its development.
- Employers not taking part in the scheme are generally concerned about the amount of work they perceive it would generate. Those operating the scheme stressed how easy it is to run.
- While some young people knew about their employer's Payroll Giving scheme none participated, and few knew many details. This was due to lack of interest and the fact that they felt they could not afford to contribute at present. Many young people did not feel the scheme was attractive or relevant to them.
- Only about one-fifth of the total population (19%) reported that their employers offered a Payroll Giving scheme. Of those using Payroll Giving, 42% had first heard about the scheme through a promotion at work indicating the important role of workplace promotions.
- 21% of the general population whose employers did not currently offer a Payroll Giving scheme said that they would or might join if offered. Currently only about 2% of all employees take part in Payroll Giving, 21% therefore represents over 10 times the number of givers currently using the scheme.
- Employers, charities and existing payroll givers thought that the most important way of boosting the take-up of Payroll Giving schemes would be through a sustained, high profile national campaign, aimed at both employees and employers. The majority of employers operating the scheme consist of many of the largest companies in the UK. Therefore a promotion could be aimed at smaller organisations as well as encouraging more employees to participate in existing schemes.
Value of Payroll Giving donations
- About one-third of payroll givers have been in the scheme for seven years or more. Only 12% have ever been asked to increase the level of their payroll donation. The scheme does not have a mechanism for addressing the gradual erosion of the value of donations. This is a particular problem as the vast majority of donations are below £500 per annum.
- There was evidence that people would give more if asked. Just over one-third of donors say they would increase their donations if prompted by a form left annually on their desks.
The full research programme consisted of the following surveys and focus groups carried out in the summer of 1999.
- A survey of the general population of the UK included 1,803 randomly sampled individuals representative of all UK adults.
- Interviews were carried out with 16 young wage earners (tax payers) aged between 16 and 25 years.
- Telephone interviews were carried out with 30 individuals earning £38,000 or more per annum.
- Questionnaires were sent to more than 8,000 current users of Payroll Giving schemes from three different agencies.
- 4 focus groups and 20 telephone interviews were held with charities and employers.
- 4 focus groups were carried out with people on low and high incomes to explore barriers and motives to charitable giving.
Types of tax effective giving
Gift Aid is a system where an individual or a business can give a one-off donation to charity, and the charity can reclaim basic rate tax on the donations. The minimum donation is currently £250 (no maximum). At the higher tax bracket (40%) the charity receives 23% tax relief and the donor receives the other 17%.
Deeds of covenant are legally enforceable commitments to pay a fixed amount regularly to charity over a period exceeding three years. There is no minimum or maximum limit. Covenants are like Gift Aid in terms of tax relief, but the system for covenants is more complex and arguably involves more administration than either Gift Aid or Payroll Giving.
Payroll Giving is currently available to employees on PAYE whose employers offer the scheme. Up to £1200 per annum can currently be given to any charity or charities and there is no minimum donation. Payment is made direct from salary, before tax, and the tax relief is given to the donor.
Millennium Gift Aid was introduced by the Government last year as a special case of Gift Aid. The minimum gift is £100 (payable in instalments if desired) and all donations go only to charities dedicated to helping the world's poorest countries, and refugees from Kosovo. Millennium Gift Aid officially ends on 31st December 2000.
Further details of all of the research are available from the following:
Debbie Romney-Alexander at CAF Research for the Payroll Giving surveys, interviews with young people and employer and charity focus groups;
Catherine Walker at CAF Research for tax effective giving aspects of the general population survey, and the high earner telephone interviews;
Pauline Jas at NCVO for the individual giving aspects of the general population survey, and the focus groups with people on high and low incomes.
The above research was carried out in conjunction with, and supported by the Inland Revenue.
CAF Research, Charities Aid Foundation, Kings Hill, West Malling, Kent ME19 4TA. Tel: 01732 520125
NCVO, Regent's Wharf, All Saints Street, London N1 9 RL. Tel: (020) - 7713 6161