Gift Aid vs Payroll Giving

Imagine you could give to charity and the cause that you’ve chosen to support will ultimately receive more than you originally gave? That’s a reality, since Gift Aid was introduced in 1990. It’s a form of tax relief on charitable donations – a clever and efficient way of ensuring that charities get more from donations.

But what is Payroll Giving and why are the two often compared and confused?

How does Payroll Giving work?

Payroll Giving allows employees who pay UK income tax to give regularly and tax-free to the causes they feel most passionate about. Their donations come directly from their gross pay, before income tax is deducted, and their charity receives the full gross amount of the donation. So the charities receive more, and the employees pay less income tax.

Payroll Giving means charities get more

The immediate tax relief on charitable donations has had a massive impact on the amount that charities receive and therefore on the increased good work that they can do. Payroll Giving is an easy and efficient way of helping good causes while you work, and making your donations work as hard as you do.

Tara Honeywell, former Head of Commercial Ventures at Barnardo’s and current Non-Executive Director of GoodPAYE

What is Gift Aid?

Donations made with Gift Aid are made from your income after income tax has been deducted. The charity receives your donation and is then able to claim back from HMRC the tax that you paid on that donation amount. So, the system enhances the amount you’ve given to charity but it doesn’t cost you any more than the original amount you decided to donate. However, it is capped at 25%, regardless of whether you paid 20%, 40% or 45% income tax.

When you donate to a charity through their own website, or through a donation site, like Just Giving, there will be an option to add Gift Aid. It’s as simple as ticking a box.

Recognising that the way people give is changing, the government is aiming to make the take-up of Gift Aid as high as possible, including spontaneous giving like after watching a TV fundraiser or seeing an advert or a charity appeal in the paper or on social media.

What’s the difference between Payroll Giving and Gift Aid?

Payroll Giving is taken straight from the employee’s gross pay, before income tax is deducted, so the charity does not need to claim the tax back from HMRC, saving them money and manpower in administration.

However with Gift Aid, donations are made after income tax has been paid, so charities need to claim the tax back from HMRC.

Gift Aid is also capped at 25%, which means charities can only claim the basic rate of income tax that was paid. Therefore, it is even more efficient for higher rate taxpayers to donate through Payroll Giving than Gift Aid as charities can receive even more tax benefit without it costing the donor any more.

Why is Payroll Giving better than Gift Aid?

It’s not a case of one being better than the other – both Payroll Giving and Gift Aid are fantastic, highly impactful ways to donate. The key difference is that Payroll Giving happens pre-tax, while Gift Aid applies post-tax. That said, Payroll Giving offers additional benefits when compared directly.

Payroll Giving allows charities to plan better and create a greater impact through their work, because donations are regular and reliable, and they don’t need to claim the tax benefit back. Instead they get the full amount straight away, which also reduces charity admin time and costs. The tax benefit from Payroll Giving donations is also larger than Gift Aid, as it is not capped, which means that donations from those supporters who pay a higher rate of income tax are worth even more to charities.

Read our Payroll Giving Guide

Interested in learning more about Payroll Giving? Read our Payroll Giving guide

Payroll Giving vs Gift Aid – real life examples

If you pay 45% income tax:

If you make an £18.18 payroll giving donation, your chosen charity will receive £18.18 but your net pay (the actual income you receive) will only be reduced by £10. So your donation in real terms only costs you £10, but the charity will receive £18.18.

If you made the same £10 donation via another method (e.g. direct debit) and ticked the Gift Aid box, the charity would be able to claim an additional £2.50 from the HMRC, making your total donation worth £12.50.

With Payroll Giving vs Gift Aid, your £10 donation is worth £18.18 with Payroll Giving instead of £12.50 with Gift Aid.

If you pay 40% income tax:

If you make a £16.66 payroll giving donation, your chosen charity will receive £16.66 but your net pay (the actual income you receive) will only be reduced by £10. So your donation in real terms only costs you £10, but the charity will receive £16.66.

If you made the same £10 donation via another method (e.g. direct debit) and ticked the Gift Aid box, the charity would be able to claim an additional £2.50 from the HMRC, making your total donation worth £12.50.

With Payroll Giving vs Gift Aid, your £10 donation is worth £16.66 with Payroll Giving instead of £12.50 with Gift Aid.

If you pay 20% income tax:

If you make a £12.50 payroll giving donation, your chosen charity will receive £12.50 but your net pay (the actual income you receive) will only be reduced by £10. So the donation in real terms only costs you £10, but the charity will receive £12.50.

If you made the same £10 donation via another method (e.g. direct debit) and ticked the Gift Aid box, the charity would be able to claim an additional £2.50 from the HMRC, making your total donation worth £12.50.

With Payroll Giving vs Gift Aid, your £10 donation is worth £12.50 in both cases. However, with Payroll Giving, the charity will receive £12.50 straight away, but with Gift Aid, the charity will only receive your £10 donation and then will have to claim the additional £2.50 back from HMRC in the future, costing them time and money in administration.