Personal Finance: Giving way to charities

Good causes can look forward to a real boost in funds after the Chancellor's overhaul of tax relief on donations, says Tom Tickell

Charities received an unexpected early Christmas present in the Chancellor's pre-Budget statement this week. In the past, people who wanted to ensure charities received tax relief on the funds they gave had to provide the funds under covenants, through gift aid and so on.

But from the new tax year in April, lump sums to regular donations, will come under gift aid, and the limits on how much you can give will disappear.

Starting to give will be much easier too. You will not have to write, saying that you want to start making charitable donations, in order to qualify for tax relief. Instead you will be able to telephone or use the Internet if the charity to which you give money has your name and address, and knows that you are a taxpayer.

"We are delighted with the changes, particularly when we had been forecasting small concessions, and not a complete overhaul," says Mike Wade of Oxfam, Britain's largest charity. "The new system will be far less complex and bureaucratic than the old one - and we hope for a real boost in funds."

One or two other charities would have liked Gordon Brown to have gone still further. They wanted tax relief on all gifts coming to them and the right to claim back the VAT they have paid on what they buy. But they are still pleased with Mr Brown's changes.

Tax relief allows the charity to collect back the tax you have paid on the money you give. The basic tax rate is to drop from 23p to 22p in the pound in the next tax year, so the value of the relief will fall too. The mathematics are complex, but work in charities' favour - each pounds 100 you give will be worth pounds 128 when the charity collects it.

The affluent and middle aged are the biggest contributors to charities - and many pay higher rate tax at 40 per cent. Charities cannot claim back the extra tax, but donors can get it back themselves by filling in details of their payments on their self-assessment form.

The government plans to provide an extra boost to the Give As You Earn scheme. Payroll giving, to use its official title, allows you to send a fixed sum each month to any charity you choose, direct from your pre- tax pay. The normal tax relief will work as it does now, but the government is to boost the returns by 10p in the pound.

If you pay tax at basic rate, the charity will do well, but it will do even better with contributions from those on higher rate tax - which come with 50 per cent relief. The limits on how much you can contribute have gone, but the average deduction is still only pounds 6 or pounds 7 a month. Your employer sends the money to a clearing house like the Charitable Aid Foundation (CAF), which then sends on what is due to a whole range of charities each month. If you want to switch between charities, you can set up a charity account with CAF. It then provides a debit card scheme, which you use to make donations.

Covenants will eventually disappear, though current ones will remain in force. That means you will no longer need to commit yourself to paying by monthly direct debit for at least four years in order for your covenant to qualify for tax relief. Getting people to start regular contributions has always been the main problem - and the changes should ease this.

Gift Aid will be more donor friendly too. Until now, you had to commit yourself to providing a lump sum of at least pounds 250 to make the tax relief magic work. But from April you can use the system to make all the payments - regular or one-off - that you want. The Treasury has given one more tweak to the system, by allowing people to claim tax relief on any gift of shares they make.

So Britain's 180,000 charities have plenty to celebrate. They range from the giants like Oxfam, Save the Children and the British Heart Foundation to tiny groups like the London charity which exists to "help decayed or indigent fish porters at Billingsgate".

The biggest charities are clearly going to benefit most from the changes - and the sums going to them are enormous. Two-thirds of the top 500 charities have an income of more than pounds 1 million a year.

No one forecast that the Chancellor was going to go back to the drawing board to start again. But charities should find themselves in a much healthier state as a result.