Volumes from Verulamium – 2.0

Well, how many do you think? Watch the video below – but not before voting here. You might even spot a guest appearance by yours truly.

Being a quick explanation of how gift aid for charitable donations works and why it affects a higher-rate taxpayer’s income

In many countries around the world, donations to charity result in a tax deduction – in simple terms, view it as if the charity earned the money, not you. For example, in a country with a flat 20% tax rate, you earn $10,000. You would pay $2,000 in tax. If you give $1,000 of that to charity, your pay that you benefit from is $9,000 and you should pay $1,800in tax. Let’s assume no national insurance/social security – and that you don’t have a personal allowance (just makes the maths easier).

How it works when everyone files a tax return and the tax authorities do the work

Now, in a lot of countries (but not the UK) it works like this:

EITHER there is no payroll tax: Your employer pays you $10,000. You write a cheque for $1,000 to charity, fill in your tax return as follows:
Salary $10,000 less
Charity $1,000

Net: $9,000
Tax due at 20%: $1,800 – you cut a cheque for $1,800 to the tax authorities, and you’re done.

OR: there is payroll tax: Your employer pays you $10,000 less $2,000 in tax (because (s)he doesn’t know anything about your charitable giving.

You write a cheque for $1,000 to charity, fill in your tax return as follows:
Salary $10,000 less
Charity $1,000

Net: $9,000
Tax at 20%: $1,800 less
Tax paid :$2,000
Refund due: $200. The tax authorities cut you a cheque for $200 and you’re done.

This is simple for the charity: they don’t need to know if you’re a taxpayer or not (just issue you a receipt so, if you are, you can prove it). And, whether or not there’s a payroll tax, you end up with $7,200 in your pocket, the charity ends up with $1,000, and the tax authorities with $1,800, making $10,000 in total. But the government has to do the admin – even for low earners, they have to process a tax return. The US (broadly) works this way – rich or poor, you file a return.

So what’s different in the UK?

Now… The UK system doesn’t work quite like this. Imagine the same facts as before – $10,000 salary, 20% flat tax rate, and you want the charity to get $1,000, leaving you with a net $7,200.

What you would do in the UK is to write the charity a cheque for $800 but, crucially, tick the gift aid box when you make the donation. The charity will claim $200 back from the taxman, leaving them with $1,000.

Your employer has paid you $10,000 less tax at 20%, $2,000, giving you a take home pay of $8,000. Less the cheque you wrote for $800, that gives you the same $7,200 in your pocket.

The benefit to the government is they process one return from the charity for all the donors, rather than a separate tax return from each donor. This puts an admin burden on the charity of course – but they don’t mind – not least because it only feels to you like you’re giving them $800 because people tend to focus on their net pay packet, not the gross amount – so psychologically it feels less, and you might be more generous.

With me so far? Ok… Now let’s assume someone earns $50,000 – enough to pay tax at 40% (assume the tax threshold is $30,000), and wants again the charity to benefit from $1,000. In effect this means they’ve benefited from $49,000 of their salary, and should pay tax of $30,000×20%+$19,000×40%=$13,600, leaving them with a net $35,400, which with the $13,600 of tax and the $1,000 the charity benefits from is $50,000.

The problem is the charity doesn’t know whether you are paying tax at 20% or 40%. If they did, you could write them a cheque for $600, tell them you’re a 40% payer, and they’d claim $400 back from the government, meaning they end up with $1,000. Your employer would look at your gross pay of $50,000 and, knowing nothing about your charitable giving, tax you $30,000×20%+$20,000×40%=$14,000, giving you a net take home of $36,000 which, after your $600 gift, leaves you with $35,400.

But, as we said, the charity has no way of knowing what rate you pay tax at. So, you give them a cheque for $800, and they claim back $200, giving them the $1,000 they need in total and they’re happy. Your employer doesn’t know about this gift, so taxes you $14,000, as before. You now only have $35,200 ($50,000, less the $14,000 deducted and the $800 cheque given to the charity). You are owed a tax refund of $200.

PAYE

In real life this is all a lot more complex – what if your pay was close to the tax rate threshold, so your gift pushed you down a bracket? And we actually have three rates (50p becoming 45p, 40p and 20p) not two, (and in practice more because of the way savings income can be tax at 10p, personal allowances abate between £100,000 and £116,200, which means you pay 60p before reverting to 40p in the band from £116,200 to £150,000 before the additional 50p/45p rate kicks in – a little known secret!)

But in essence it holds true – in our example the higher rate taxpayer had paid too much tax. By filling in a tax return, (s)he could claim it back.

Under PAYE it is easier to fix – in practice because your employer is told something about your tax, such that they know to deduct $200 less. This doesn’t work if your giving is variable from year to year – if you do fill in a return, the taxman asks you to split gifts between regular, which (s)he assumes will be broadly similar each year, and one-offs have to be ‘claimed’ each year (whether a full blown return, a simple letter or perhaps even a phone call). But the principle is the same – by your tax code and/or tax return, you’d get the $200 overpayment back.

A similar issue theoretically arose in the days of the 10p tax band – the charity would benefit from 20p, but you’d have only paid 10p – meaning that for fairness sake you ought to pay the extra 10p back to the taxman.

psychology of giving and proposals for change

You can stop reading here if all you wanted to do was to understand why higher rate taxpayers get a tax rebate when they gift aid donations, and why this may change their tax code

As mentioned above, people focus more on the net cash they give than the gross – not least as it is irrelevant to someone fairly and squarely in the middle of the basic rate band. And even if you are a higher rate payer, the lag is such that you may not focus on it (gifts in the year ended 5 April 2012 are reported on a return due in by 31 January 2013 (or 31 October 2012 if you still file in paper) and may result in an adjustment to your 2012/2013 or potentially 2013/2014 tax code.

The complexity of the system (the government has to process adjustments for higher rate, but not basic rate taxpayers), the admin involved for charities (tracking who has/has not made a gift aid declaration) and the potentially unpredictable effect on the tax take resulted in the last Labour government looking into changes to the system. They proposed that higher rate taxpayers would not get any credit back, but that charities would claim back more than the 20% – in effect, an assumption would be made about the proportion of donors who pay no tax, 20p and 40p, and a blended average would apply to all charities. This would have the effect of increasing tax paid by higher rate taxpayers, but increase tax reclaimed by charities. Whether higher rate taxpayers would reduce their net cash gift or not to reverse this effect was unknown, and different charities had different views depending on the wealth profile of their donor base. The tax take is also unclear – not least as not all higher rate taxpayers complete a return these days and therefore people often forget to claim the refund for gift aided donations.

GAYE or payroll giving – a simpler system

You’ll see above that in the US-style model, the taxpayer does the work by filing a return to get their reliefs right and in the UK the charity does the work for all taxpayers with higher rate taxpayers having to do a little extra work. There is actually another system commonly used in the UK and elsewhere which puts the burden on the employer – give as you earn (GAYE) or payroll giving. This works by (in effect) asking your employer to give some money to charity out of your gross salary before deciding what to pay you.

The employer has to do some admin although, where this is to encourage gifts to a charity supported by the employer, this may not be too burdensome – by contrast, ifeveryone asks their employer to give to a different charity, the cost of make multiple payments could be prohibitive. The charity is paid gross and doesn’t have to worry about whether or not you have made a gift aid declaration, nor do they have to reclaim anything. And, because your taxable Paris after the donation, you don’t need to worry about claiming any refund, whatever your tax rate.

Disclaimer: this is an example for illustrative purposes, and represents a simplified view of the world and should not be relied on for the purpose of taking any decision on charitable giving and/or tax. If in doubt, consult a tax advisor.

Well, two dudes, and me, who’s not really a cool dude:

Two genuinely nice, friendly people.  And very happy to sign a couple of books and pose for a picture.  Walked back past the shop after they were supposed to be done – there was still a long queue and yet they were still smiling and signing.

It’s always nice to support your local independent bookshop.  Sadly St Albans lost theirs when Paton Books closed (although they do still run a book fair in the Town Hall on a regular basis). But Maher Books in Welwyn Garden City is only a few miles away, well stocked and the staff are always very friendly.  OK, so you can order from Amazon, and cheaper, but it’s nice to be able to browse sometimes, and if you’re doing that the least you can do is support them.   They’re on the third floor of the Howard Centre just by the stairs down from the carpark; why not pop for a coffee in Bebo afterwards? Best coffee shop in the town and just outside the other end of the Howard Centre. Their salads and soup are rather good too!

And to finish off my review of the year…

July – 199/365 Skater

August – 217/365 Abandoned

September – 251/365 Ziggurat

October – 303/365 Look of Love

November – 312/365 Remembrance

December – 352/365 Reflection

You may (if you have a long memory with a capacity for very small and unimportant details) recall that I was doing a Projec365 – one photo a day for a year.   I started off posting them on here, but soon stopped because it was one more step beyond posting to Flickr, and most of you who are on here and of a photographic bent are also on there.

The time has come, however, for me to bore you one final time with 2009. Herewith my “best of” – a shot per month which I think was the best.

January – 26/365 Old man river

February – 33/365 Winter

March – 81/365 Bawa

April – 109/365 Odeon

May – 140/365 In tune

June – 158/365 Billy

Actually, I lied.  I’ll bother you twice – there’s still the second half of the year…

Friday afternoon was a belated birthday treat.  Mum and I went to see Cirque du Soleil’s current touring show, Varekai, in London. 

One word review: Wow!

More than one word review: What a show.  Completely unlike childhood trips to the circus, yet clearly the circus and not just dancing.  A magical story, humour, and infectious music…

Best viewed large!

This heron was hanging around a coot’s nest in Verulamium Park on the River Ver.

I suspect he was looking for dinner

Technical notes: Nikon D90 with Nikkor 50mm f/1.8 AF. ISO 200, 1/60 at f/4.0.

Technical notes: Nikon D90 with Nikkor 50mm f/1.8 AF. ISO 200, 1/50 at f/1.8. Model: Phoebe.  Consumables: Chicken and cheese!

Technical notes: Nikon D90 with Nikkor 50mm f/1.8 AF. ISO 200, 1/1050 at f/3.5.  Lots of fiddling with levels in Lightroom to get the Abbey visible without the sun blown out in the sky.

Street performer, Covent Garden.

Technical notes: Nikon D90 with Nikkor 50mm f/1.8 AF. ISO 200, 1/1250 at f/2.8