Emma Howard

Doing your fair share: why paying taxes is not giving to charity

If you’re anything like me, when reading the paper or the news online you may be drawn to sensationalist headlines concerned with aid expenditure, international aid being delivered at the expense of local needs and the plight of the taxpayer. These headlines can provoke public outrage at the perceived cost of foreign aid to the taxpayer, often resulting in the formation of a generally negative (though often ill-informed) consensus about the value and repute of aid and international development initiatives. As a consequence, one may come to believe that by virtue of paying taxes they are doing their “fair share”.

Some of the world’s wealthiest make claims tantamount to asserting that paying taxes and making charitable donations or gifts are pretty much the same thing (examples to follow). Those who earn the most are taxed the most, so it is easy to see how this deduction is made. However, the argument I am going to lay out outlines why I don’t believe that paying taxes and giving to charity are the same thing. I will present it using three myths.

Myth 1: If people were taxed less they would give more

This myth concerns the demand for greater governmental disclosure and accountability for where exactly taxpayer dollars are being spent, and the belief that the public's money would be better spent on altruistic causes if left in their own hands.

 that paying tax and charity are essentially interchangeable crops up in the news from time to time. An 

 of this is when Mitt Romney tacked his charitable contributions onto his tax returns when stating the percentage of his income reported and paid on his 2010 return. He used this same tactic 

 when defending his record regarding his previous refusal to release past tax returns.

 has been to lower tax rates in the US in order to free up more money for individual charitable spending. His reasoning is that individuals can make better decisions about where to give and what society’s needs are than the government. An example of this viewpoint might go something like this “I know my own community better, and I am therefore more sensitive to where my money would be better spent than some far-removed government bureaucrat”. The problem with this logic is that although it may hold some truth, it does not apply to everybody. 

 conducted in the US shows that people from more economically diverse communities are more likely to give to pro-social causes than those living in homogeneously affluent areas. People in affluent areas tend to adopt a more insular perspective, with donations predominantly going into non-profit organizations that serve a direct benefit to themselves or their direct community. As such, donations from the very wealthy tend to be channeled into elite colleges and universities, arts organisations and museums.

When challenged on the disproportionate amount of voluntary giving compared to the wealth of a given individual or family, people often respond with the claim that they would give more (and better) if they were taxed less. Although research on this phenomenon is limited, some US studies report that when taxes go down, people actually 

”, and it means that when the price of giving goes up, the value of the tax deduction per donated dollar is less. Whilst reducing taxes would certainly increase the amount of discretionary money available to the very wealthy, it is unfortunately not a reality that this money would go into charitable causes, it tends to just 

 the individual lays claim to. Therefore, although lowering taxes may seem like an attractive proposition to increase charitable giving, this would be unlikely to translate into any real behaviour change. It is simply not the case that taxes provide the biggest barrier to giving, it’s the philosophy behind giving that matters most.

Myth 2: A large proportion of my taxes are being spent on the developing world:

The gross overestimation of foreign aid expenditure appears to be one of the most pervasive and challenging beliefs to dispel in public opinion. One research study revealed that the average American believes that as much as 

 of the public budget is spent on foreign aid, and believed that the appropriate amount of foreign aid would reside in the region of 

. In fact, the actual federal budgetary allocation for poverty-focused development aid in the US is less than 

. Even at its highest estimation the entire international development budget only sits at 

To give you an idea of what this works out to per American taxpayer, the amount of tax dollars spent in 2012 on the developing world was 

. One might still argue that this seems a lot. In response, I think the following illustration proves useful:

If I asked the average person “what matters most to you? Chocolate or a starving child?”, I expect that most people would agree that a starving child is more important. If I then took that question one step further and asked “Given the choice, how much would you spend on chocolate per year compared to helping that child in need?” I would predict that even the biggest chocoholics amongst us (myself included) would prioritise the hungry child above a love for chocolate. However, if we were to compare the 

 on “candy” per year per american in 2012, it far exceeded expenditure on foreign aid, with candy expenditure estimated at a cost of $101.76 per person. A further $126.02 was spent on lawn care and $204.78 on soft drinks in the same year.

By comparison, the UK is the world’s third biggest donor, with the Prime Minister pledging to commit to 0.7% of the national budget into foreign aid in line with the 

. With a British population of approximately 62.6 million, the 0.7% target would equate to an eventual annual cost of 

 per British taxpayer. According to current British overseas spending, this works out as 

 per taxpayer. When asked in a recent poll, 59% of Britons surveyed voted for a total decrease in international aid expenditure by the British government. However, if we go back to the chocolate example, annual British spending on chocolate and confectionary was 

 per person in 2011, which works out as more than twice the foreign aid contribution per taxpayer for that year. As a society, what does it say about us that we would favour giving even less to help the world’s neediest than we would spend on chocolate in a given year?

To me this expenditure gap represents a massive judgement lapse in the prioritisation of need, and I believe we 

 be doing better for the developing world than this. I will go as far as to say that according to candy/ lawn care or soft drink expenditure, it would appear that most of us in the developed world still have space in our personal spending budgets to help those in need without much sacrifice to ourselves, and the moral case for making that small sacrifice appears strong.

Bill Gates recently addressed the impact foreign aid spending has in a 

. Compiling aid spending on health since 1980 divided by the number of children’s deaths prevented in the same time, he arrived at a ball-park figure of approximately $5,000 USD per child’s life saved. Bear in mind this figure didn’t include resulting health improvements to improve quality of life, so impact is even greater than this figure suggests. Although $5000 may seem expensive, it is important to keep in mind that the U.S. government 

 an American life at several million dollars. Additionally, Gates notes that healthy children do more than simply survive. Given the opportunity, surviving children can get an education, find employment, help economic growth and become self-sufficient in their communities. By employing this perspective, one could argue that aid is a bargain buy.

Myth 3: Charity starts at home: taxes to the developing world are being delivered at the expense of local needs

A common misconception exists that asserts that any international aid efforts divert resources away from local communities in need. In times of domestic economic austerity, many people believe that local governments and charities should be channeling all their funds into meeting local needs instead of the “far away” problems of another land. However, Tanner makes a convincing 

 to the contrary responding to calls to axe international aid saying “

Whatever way you look at it, it is wrong on at least three fronts. Firstly, it assumes the aid budget is too big. Secondly, it suggests that dealing with suffering in Britain can only be done by compounding suffering elsewhere, and thirdly, it ignores the realities of government

In the UK, with a 0.7% foreign expenditure allocation and at least 99% of the remaining budget being spent locally, the idea that international aid takes away from the notion of “charity starts at home” is unfounded and damaging to aid efforts. For the relatively small amount of money the UK designates to international aid, the difference that is made is substantial compared to the potential difference that money could make locally. For example, Britain currently sends 

 of the world’s poorest children to school in developing countries for only 

 of the cost of sending the same number of children to school in the UK. The time has come for us to evaluate why the 99% of fiscal inland spending is not effective enough, rather than calling for the 0.7% foreign aid budget to be reallocated domestically. The point I am not making is that aid is perfect, but rather that it does not present as sizeable a drain on resources as one might think.

Furthermore, it is often the case that domestic aid efforts and expenditure fly under the radar of the public eye, and the media attention that international aid garners can sway public opinion without substantive evidence. 

 recently responded to claims that they do not mobilise enough resources towards tackling local problems. They 

 claiming that although local rescue efforts may not attract as much press attention or occupy the center of their public media campaigns, local expenditure still exceeded foreign expenditure at £28.1 million vs. £25.1 million last year.

Moreover, the idea that “home” (wherever that is) exists as an isolated entity independent of any overarching global problems is short sighted. For example, it is predicted that the energy-related 

 will exceed those of developed countries by 127% by 2040. Therefore, the neglect of global issues or people via political or cultural labelling could have potentially devastating effects on a global scale. This is not merely limited to climate change, but impacts population control, immigration, global disease burden, water and environmental and economic sustainability. We are all equal stakeholders in the welfare of our shared planet, and the current reality is that some of us have more financial means than others to address these problems. It would be wrong to assume that the benefit is exclusively one sided, so we need to start thinking of aid less as a rescue and more as an investment.

, all those in favour of a common good need to challenge the notion that private avarice is a substitute for both public and moral responsibility towards serving that good. The answer to global poverty is unlikely to lie in the diversion of tax money into millionaire’s pockets, the axing of foreign aid or a libertarian state. So, instead of citing tax-induced poverty or that we’re doing “our fair share”, let’s start spending less on chocolate and more on 

Tax efficient giving: A guide for UK donors

At Giving What We Can we believe in not only in donating to the 

 in need of funding, but we also believe that when giving it is important to make prudent and informed tax-deductible donations to make your money count the most where it possibly can.

Before making a donation, there are some important rules you should be aware of that govern the gifting of money to charity.

Put simply, there are two facets to pay attention to when thinking about tax and giving:

Is my chosen charity eligible for tax deductions/ Gift Aid?

How can I reduce my own tax bill by donating?

Whilst there are no legal restrictions to the amount of charities you decide to support or the size of the donation you want to make to a registered charity, at Giving What We Can we advise against breaking a donation up between multiple charities when giving small amounts, as this reduces the impact your donation can have. There are some tax implications to consider before going ahead with your donation. It might seem like a lot of extra effort to go to, but by making tax-efficient donations you can substantially increase the value of your donation to your chosen charity. What’s more, by making charitable donations it is also possible to reduce your own income tax bill if you are in the higher earning bracket. Here are a couple of the most tax-efficient schemes to look out for:

 was a scheme introduced by the UK government to support registered charities. This scheme allows registered charities to reclaim income tax in order to boost the value of donations made. As income is so variable and for simplicity’s sake, charities can only reclaim income tax at the basic 20% rate on each donation. In practice, this means that if you donate £10, the charity will actually receive £12.50 by claiming back on Gift Aid, plus additional government subsidies that we won’t go into here.

Additionally, if you are a higher income taxpayer who pays a 40-50% tax rate (i.e. if your income falls in the region of £41,866 - £150,000+ per annum) , you are eligible to reclaim the difference of the 20-30% you were charged on top of the deductible 20% Gift Aid rate the charity receives.

In the 21 years since Gift Aid was introduced, registered charities have garnered an additional 

 in tax reclaims on donations in the UK. However, the Charities Aid Foundation (CAF) estimates that an additional £750 million pounds of potential tax reclaim benefit goes unclaimed each year. This represents a vast loss of resources that could be materially changing and saving lives if allocated effectively!

In order to claim any tax benefits for both yourself and the charity, the organization you are donating to must be a registered charity for tax purposes by the HM Revenue and Customs (

). You can check this by looking for the charity’s HMRC reference number on their website or by asking your charity to confirm that it has an HMRC charity reference number if you cannot find it listed online. Gift Aid can be applied to any UK, EU, Norwegian or Icelandic charity that is registered with the HMRC, but you have to be a UK taxpayer to be eligible for Gift Aid.

If your donations are made under the Gift Aid Scheme, you may need to fill out a 

 in order for your charity to claim tax back on your donation. This form authorizes the charity to claim Gift Aid on your behalf. In order to be eligible for Gift Aid, you must be a UK taxpayer and have paid enough income tax or capital gains tax to cover the amount the charity will reclaim on your donation.

If you haven’t paid enough Income Tax this year to claim the 20% Gift Aid tax rebate on your donation, it is possible to "

" and reclaim Gift Aid on donations from the previous tax year by completing a request via a Self Assessment Form, or by contacting your 

You will need to keep records of all donations you make to registered charities including the dates and amounts, as well as any receipts for bank transfers or cash donations. Details about how to record your donations can be found 

You can make a Gift Aid eligible donation to one of our recommended charities 

If you require tax reclaims as a higher rate taxpayer (paying tax at 40% or more), you will need to either fill in a 

Giving through your pay or pension to charity

You can also give money to charity directly from your pay or personal pension by using the 

 scheme in the UK. This is an easy way to increase the value of your donation at the least cost to yourself, as your donation is deducted from your gross salary BEFORE tax, so you don’t pay any tax on it. For example, if you give £1 through PayRoll Giving, it will only cost you 80p before tax, and 60p if you are a higher rate taxpayer.

Using the Payroll scheme you can give to as many charities as you like and you can cancel your Payroll giving agreement at any time.

Capital Gains Tax refers to the tax that is due when you give away, sell, exchange or otherwise dispose of certain assets such as shares or property, and by doing so you exceed your annual exemption limit for that tax year. In the UK, this is currently £10,900 for each individual and £5,450 for most trustees in the current tax year of 2014. All gifts to charity qualify for Capital Gains Tax Relief. In practice, this means that all gifts to charity are exempt from tax. Additionally, in 

 you can file these donations as losses to reduce your Capital Gains Tax liability elsewhere.

Declarations of capital gains and losses are made through the Self Assessment tax return system; for more information on what you need to report, visit the 

. Usually you don’t need to complete a self assessment tax return, but you will need to complete a 

Income Tax relief on Gifts of Shares/ Assets:

Income Tax refers to the tax on your income. Your income includes the earnings you make from employment, interest on savings or income from rentals or a trust and your pension.

You can claim Income Tax relief on gifts and lower your tax bill if you:

Give land or buildings in the UK or qualifying shares to a charity;

Sell these to a charity at less than their market value;

Qualifying shares include those listed on any stock exchange.

Income Tax relief works a little differently to Capital Gains Tax relief in that not all gifts to charity are eligible for Income Tax relief.

The assets on which you can claim Income Tax relief are restricted to the following:

Shares and securities listed on the UK or another internationally recognised stock exchange;

Units held in a FCA authorised unit trust;

Shares held in a UK OEIC (Open Ended Investment Company);

Certain foreign collective investments – similar to 

You can find more information on gifting assets to charity and the tax relief available by visiting the 

Inheritance Tax is paid on an estate when somebody dies. If you leave a gift to charity in your will at least seven years before your death, its value will not be included when valuing your estate (which includes your possessions, property and money) for Inheritance Tax purposes.

Moreover, any estate that is valued at more than the £325,000 Inheritance Tax threshold is eligible for a reduction in Inheritance Tax by donating part of the estate to a registered charity. If you donate 10% or more of the estate to a qualifying UK registered charity, the rate of Inheritance Tax applied to any value in your estate that exceeds the £325,000 threshold will be reduced from 40% to 36% in total tax charged.

However, unfortunately not all parts of the estate may qualify for the reduced rate of Inheritance Tax. It is therefore important to consider whether the 10% donation will benefit your beneficiaries according to the make-up and total value of the entire estate. For more information on reducing your Inheritance Tax bill by donating to charity, visit the 

Keeping records of your donations to charity

The importance of record-keeping cannot be understated. In order to reap the benefits of tax relief on charitable giving, it is essential to keep detailed, up-to-date records of all your donations to charity to make sure that you claim the correct amount of tax relief and pay the right amount of tax.

For every tax year, you should keep the following records:

Details of Gift Aid donations showing the date, the amount and the charities involved;

Legal documents showing the sale or transfer of assets to charity - including share transfer documents or certificates or land transfer documents;

Any documentation from a charity asking you to sell land or shares on its behalf

Find out more about keeping records of your gifts to charity

All of the Giving What We Can charities are eligible for Gift Aid if you make a donation via the 

. Additionally, if you require further information on tax-efficient giving and exactly what you or your chosen charity are eligible for, you can contact the 

Emma grew up in Zimbabwe and completed her undergraduate studies at the University of Cape Town. She has been involved in various paediatric outreach projects concerned with health and education.

Emma Howard

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Doing your fair share: why paying taxes is not giving to charity

Tax efficient giving: A guide for UK donors