Payroll Giving, or “Give As You Earn”, is a straightforward and tax efficient way of making regular gifts to charity.

While perhaps less well known than other schemes such as Gift Aid, Payroll Giving is available to anyone who pays income tax on their earnings through Pay As You Earn (PAYE), and anyone who receives a company/personal pension where the provider deducts tax through PAYE, provided that the employer or pension provider runs the scheme.

Payroll Giving has obvious attractions for charities as they receive regular donations rather than just one-off payments, allowing them to budget more effectively. It also assists with cash flow: the charities receive the full amount immediately, rather than having to wait for tax already paid by donors to be repaid by HMRC, as with Gift Aid.

Payroll Giving also has attractions for employers, improving their brand’s image with both clients and staff, and helping support their corporate social responsibility goals. 

However, Payroll Giving has advantages for some taxpayers as well.

The scheme is very convenient, with individuals nominating one or more charities to receive a set amount out of their earnings or pension, whether they are paid weekly or monthly.

Once set up, the donations are shown on the employee’s payslip. Donors can cancel or vary the amount of the payments at any time, although it is not possible to refund any payments which have already been made.

The donations are then automatically deducted from the employee’s gross pay before the deduction of income tax (but after the deduction of national insurance), for example:

  • If a 20 per cent taxpayer makes a payment of £10, this will only cost him or her £8
  • If a 40 per cent taxpayer makes a payment of £10, this will actually only cost him or her £6

As you can see, this means that you only pay tax on the amount you actually receive in your pay or pension after the donation.

And, for higher rate taxpayers, this is the only scheme which allows charities automatically to receive the full amount of income tax on your gift ie, both the basic rate of income tax and the difference between the basic rate and higher rate of income tax at 40 per cent or 45 per cent.

It is recommended that only UK registered charities are chosen, but with 180,000 registered charities in the UK there is likely to be at least one which meets the donor’s aims. Although the payment is being made directly by your employer or pension provider to your chosen charity, it is still possible to make your gift anonymous.

Payroll Giving schemes are run through specialist agencies (which are themselves charities), rather than by the employers, and there are three main agencies in the UK, which are regulated by HMRC.

Although the agent will deduct an administration fee, it can still be cost effective for the charities to receive funds this way – otherwise, they have to process Gift Aid declarations themselves in order to secure the tax refund, also meaning they have to wait to receive the tax rebate. Some employers pay the agency’s fees allowing the charity to receive the full amount donated.

One last point about Payroll Giving – payments will stop automatically if the employee leaves employment, so if the employee wants to continue making donations in this way, the employee must make the appropriate arrangements with their next employer.

Please note that, although the details contained in this article were correct at the time of going to press, the Government launched a consultation on proposals to reform the Payroll Giving scheme on 24 January 2013 and so various details may change. The deadline for responding to the consultation is 19 April 2013.