One of the most tax-efficient ways of donating money to a UK registered charity is to donate through Payroll Giving (also called Give as You Earn). For higher rate tax payers Payroll Giving is the only way the charity of your choice can automatically receive all your tax on your charitable donation and for all tax payers Payroll Giving is the most beneficial way to donate your zakah to a charity with 100% donation policy. For zakah donations you must donate to a to a charity with 100% donation policy to ensure your zakah obligation is fulfilled.
How does it work?
Any donation(s) you make to a UK registered charity is taken form your salary after your national insurance contributions but before income tax is calculated and deducted. For the donor this has considerable financial benefits and for the charity it takes out the administrative hassle of having to claim Gift Aid. Under normal circumstances if a donor wishes to give £1000 in zakah then as a standard rate tax payer (20% rate tax) he (or she) must have earned £1250, after deduction of NI contributions, to receive a net income of £1000 which he (or she) donates as zakah to a charity which will pass on this money to those eligible to receive zakah. For a higher rate tax payer (40% rate tax), he (or she) must have earned £1666.67, after deduction of NI contributions, to receive a net income of £1000. However, if the zakah payer donates through Payroll Giving he (or she) needs only to earn £1000, after deduction of NI contributions, to pay zakah of £1000. The standard rate tax payer saves £250 and the higher rate tax payer saves £666.67. Another way to look at it, is that to pay £1000 of net income in zakah costs the standard tax payer only £800 and the higher tax payer only £600 if paid through Payroll Giving. The national insurance contributions are not affected as these are taken before any charitable donations are made. The table below summarises the financial benefits.
Amount of zakah to pay
Cost to standard (20%) rate taxpayer
Cost for higher (40%) rate taxpayer
Cost to additional (45%) rate taxpayer
Fig. 2 This is an example of an employee who is a higher rate tax payer (40% rate) and earns £1666.67 after NI deductions. He wishes to donate £1000 in zakah. After income tax of 40% he receives £1000 from his employer which he donates to a charity of his choice which distributes it on his behalf as zakah. The charity can claim £250 as Gift Aid.
Fig. 3 This is an example of an employee who is a higher rate tax payer (40% rate) and earns £1666.67 after NI deductions. He wishes to donate £1000 in zakah. He donates £1000 directly to a Charity of his choice via Payroll Giving. He receives £400 from his employer and £266.67 is paid to HMRC.
Which Charities Can Receive Such Donations
Any UK, EU, Norwegian or Icelandic charity that is recognised by HMRC for tax purposes can receive gifts this way.
How is Payroll Giving Different from Gift Aid
When you make a direct donation to a charity and you tick the box that allows the charity to apply for Gift Aid on your donation, then the charity claims back the 20% income tax you have paid to HMRC on your donation, this works out to be £25 on every £100 you donate, i.e. 25%. The charity does have to go through the hassle and administrative procedure of claiming the Gift Aid, many charities employ a third party to claim Gift Aid on their behalf. If you donate through Payroll Giving you get the tax benefit and the charity does not have the administrative hassle of claiming Gift Aid.
Benefits to the Donor
Donating through a Payroll Giving is particularly beneficial to higher rate tax payers with large zakah donations. Of course, one must ensure the charity being donated to has a 100% donation policy for zakah.
How to go About Donating Through Payroll Giving
Firstly, you need to contact your payroll/ HR department to check if your employer offers Payroll Giving. If your employer does then complete a mandate (donor) form which is usually obtained from the payroll/ HR department or the Payroll Giving Agency (PGA) your employer has signed up with. My employer, Central Manchester Foundation Trust, has signed up with STC Payroll Giving (http://www.stcpayrollgiving.co.uk/index/). The form will ask you to give the name(s) of the charity(ies) you wish to make a donation to and the amount you wish to donate.
It is also possible to open an account with the Charities Aid Foundation (CAF) in to which you can desposit money on a monthly basis through Payroll Giving, then allocate these funds to a charity of your choice using either the online account page, or by using the cheque book you will be provided with. The CAF Charity Account incurs higher costs, Charities Aid Foundation will charge an administrative fee of 4% on payments in to your CAF Charity Account, up to the value of £20,000 (calculated annually). For sums over £20,000, the fee is reduced to 1%.
Does my Employer Need to Know Which Charity I Support?
No. Once you have completed the mandate (donor) form this can be sent directly to the Payroll Giving Agency (PGA). The PGA will inform your employer how much money you whish to donate and needs to be deducted from your salary. Alternatively you could ask for a Charity Cheque Book or Vouchers so that you can give directly to the charities of your choice. Most PGAs offer this service; a minimum amount of donation is usually necessary.
Are There Any Costs Involved?
The Payroll Giving Agency (PGA) do charge a fee which they deduct from the donation before distributing to your nominated charity, the Charity Aid Foundation charges either £0.25p per donation or 4% whichever is the greater with a cap of £10. Many employers pay the PGA fees so they your full donation reaches your nominated charity(ies).
How do you Know Your Donation has Reached Your Charity?
You can tick a box on the mandate (donor) form that you wish to receive acknowledgement from your nominated charity(ies) upon receipt of your donation.
Can my Donation be Refunded?
No. Once your donation has been deducted from your pre-tax income it must go to a charity. If you have put down a charity which is not recognised by HMRC as being able to receive Payroll Giving the PGA will forward your donation to a charity which has similar aims to the one you nominated. They will let you know that this is what has happened and this gives you the opportunity to amend your form and select another charity.