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Charities brace for gift aid reduction as cost of living bites

Charities grappling with rising prices, falling donations and increased demand for their services face a further blow from April 2027 when the amount they can claim through the gift aid scheme will decline.

A recent poll by Charity Aid Foundation, a charity, found that more than one-fifth of regular donors in the UK are considering reducing donations over the next six months to relieve financial pressure, while inflation will knock £500mn off the £5.4bn donated to charities in the first half of 2022, according to Bank of England forecasts.

“Despite falling donations, charities are working hard to help the growing number of families at the sharp end of the cost-of-living squeeze. Ultimately, charities are having to do much more with much less money,” said Neil Heslop, chief executive of CAF.

Richard Sagar, head of policy at Charity Finance Group, which helps charities improve their financial management, said: “We thought Covid was bad, but from the discussions we are having, there is far more concern now, and it’s not clear where the end point will be.”

A further squeeze on charities emerged last month, when chancellor Kwasi Kwarteng announced a drop in the basic rate of income tax. The gift aid tax relief scheme, which boosts charity finances, is linked to the basic rate, since gift aid offers UK taxpayers relief on any donations made. The existing level of relief will be phased out, disappearing in 2027.

With income tax at the current rate of 20 per cent, each £1 donation accrues an additional 25p in gift aid. When income tax drops to 19 per cent, each £1 will be topped up by £23.46p, according to Sam Mercadante, policy manager at the UK’s National Council for Voluntary Organisations.

“This seems small, but it means that there will be £15.4mn less per £1bn in eligible donations,” Mercadante said.

However, charity groups have welcomed the government’s decision to extend the transitional relief to April 2027, an extension of a year from Rishi Sunak’s plans when the then chancellor previously announced the fall in the income tax rate from 2024.

Despite the pinch, Mercadante said she supports the scheme’s link to income tax because “the fact that it’s a relatively automatic mechanism, rather than a lump sum that the government has to decide to spend each year, really protects it from political whims”.

Charities are looking to shore up finances by ensuring those who are eligible to claim gift aid do so. Research sponsored by HM Revenue & Customs in 2018 identified a gap of £560mn between what was claimed through the scheme and what could have been. The same research found £180mn was incorrectly claimed.

Gift aid was worth £1.3bn for the tax year ending April 2022, according to HMRC data. Analysis by research agency nfpResearch found public awareness of the scheme has declined over the past decade, with just two-thirds of the population correctly identifying it as a method for charities to reclaim tax on donations.

The number of charities claiming gift aid has declined from a peak of 73,210 in 2018-19 to 65,470 in 2021-22, a trend the government ascribed to fewer charities claiming small amounts. “It’s hard to say how many charities could have claimed but didn’t,” Mercadante said.

She also noted delays in the Revenue’s processing of claims, which caused cash flow problems at charities. “Some charities making very large claims are finding that it takes months for those claims to be processed and paid,” she said.

HMRC told the FT that the agency aims to pay gift aid claims within five weeks, but will occasionally carry out additional checks to ensure a claim is correct, “which will take extra time”.

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