In 2009, when the then chancellor Alistair Darling introduced a 50% income rate for those earning over £150,000 it broke one of our clients. In his view if the government was going to take more than half of his earnings (once you included National Insurance) then he would rather give all of his income over this new limit to charity.
I was speaking at a conference of major charity fundraisers shortly afterwards and made the mistake of quoting his extreme tax planning. It took me a further 5 years to shake off the constant requests from the major charities to be introduced to my clients.
George Osborne eventually removed the 50% rate but then went on to introduce new rates two of which were worse and targeted parents.
Giving to charity can be a great way to reduce your tax bill. Charitable giving gives income tax relief at your highest rate. This can be really powerful if you are just over one of the various nasty income tax thresholds as it can bring you back down into the tax bracket below.
- •If you earn over £50,000 you will pay 40% income tax on the excess.
- •If you earn over £60,000 you will pay 51% tax if you receive child benefit for 2 children.
- •If you earn over £100,000 you will pay 60% income tax on the excess.
- •If you earn over £100,000 you will pay 1,000% tax if you receive free childcare for 2 children.
- •If you earn over £125,000 you will pay 45% income tax on the excess. These are the nasty income tax traps set by previous chancellors and particularly for the ‘cliff edge’ tax on free childcare hours, the power of a charitable donation is huge at these levels.
Of course, donating to charity the excess over these thresholds does not mean that you end up with more ‘net’ money. You have, after all, given away 100% to the charity rather than the above rates to the tax man. However, if you have a cause that you already care about, it can feel a lot better to donate 100% rather than giving the government 60% for example.
The most tax efficient way to give to charities in this scenario is to give via salary deduction. This avoids the need to file the tax return, as your gross income is reduced at source and removed from these nasty tax traps. At the moment Phoenix do not have a payroll giving option.
MyChoice does give you the option of ‘Pennies from Heaven’, which works by donating to a pre-chosen list of charities, the pence in your monthly salary. Phoenix will also match this donation which means that the charity will benefit from a huge donation compared to the net cost to you in salary. The drawback is the limitation of the structure which means that a maximum of 99p per month is donated (plus a further 99p from Phoenix).
If you want to discuss charitable giving to reduce your tax burden or in fact one of the other options open to you as a Phoenix staffer, do contact the Phoenix @ Altor team
