Government performs u-turn on charitable donation tax relief cap

In his Budget in March the Chancellor announced that a cap on income tax reliefs claimed by individuals would be introduced for unlimited tax reliefs, including relief for donations to charities. It was proposed that from April 2012 there would be a limit of £50,000 or 25% of income, whichever was higher, on the amount on which an individual could obtain tax relief.

Since the announcement there has been considerable opposition to the proposal from both charities and potential donors. Universities were also potentially affected by the change and it is understood that the Vice Chancellors of both Oxford and Cambridge Universities wrote to the Chancellor expressing their concerns about the proposals.

In a survey of 120 charity chief executives and senior executives conducted over the Easter weekend by the Charities Aid Foundation, 78 per cent of executives thought the Government should reverse its decision and more than half believed the proposals would lead to a significant reduction in income from major donors, with 56 per cent of them believing that major donations would fall by at least 20 per cent.

In announcing the change of direction Osborne said: "I can confirm that we will proceed next year with a cap on income tax reliefs for wealthy people, but we won't be capping relief for giving money to charity".

He stated that the government had listened to the views of charities. "It is clear from our conversations with charities that any kind cap could damage donations, and as I said at the Budget that's not what we want at all. So we've listened." said Osborne.

"This was a poorly thought-through proposal which would have harmed charities without being well-targeted on abuse." said Janet Hoskin, a charity tax expert at Pinsent Masons, the law firm behind Out-Law.com. "The perceived abuses the Government was seeking to counteract should already be covered by existing anti avoidance provisions. As a result of this u-turn we expect the existing anti avoidance provisions to be enforced more vigorously".

Sir Stuart Etherington, Chief Executive of the National Council for Voluntary Organisations, said: "We are delighted that the Chancellor has listened to reason and pledged to drop the charity tax."

The Government will be going ahead over the summer with its planned consultation on the form the cap on the other income tax reliefs will take.

In his Budget statement in March 2012 the Chancellor announced that the cap would "make sure that those on the highest income contribute a fair share" as "it can’t be right that some people make unlimited use of these reliefs year after year". 

Under current rules when an individual who is a UK taxpayer makes a donation to charity under the gift aid scheme, the charity can claim back from HMRC tax at 20% of the gross equivalent. This means that on a gift of £100, the charity can claim back £25 giving it £125. 

In addition if the individual pays tax at 40% or 50% they can claim additional tax relief from HMRC on the total 'gross' value of the donation. So that on a donation of £100, the total value of the donation to the charity is £125 - so a taxpayer paying tax at 40% can get tax relief of  £25 (£125 × 20%). A 50% taxpayer can get tax relief of £37.50 (£125 × 20%) plus (£125 × 10%).

There is currently no cap on the amount of tax relief an individual can claim on charitable donations.