(I’ll do my best to explain. Let me know if anything is unclear.)
In the UK, the donation amount is subtracted from gross salary to get to taxable income. The employer will then use this taxable income to calculate how much tax the employee needs to pay.
For example, an employee earning £5,000 a month and donating £500 a month to charity through Tyve would have their tax calculated on a taxable income of £4,500 (assuming they have no other similar deductions).
Since the employee has captured the tax benefit on their donation immediately (they’ve avoided paying tax on the £500 that they gave), they can’t also list the donation as a deduction on their end of year tax return.
In theory the tex benefit is merely moved forward, but in practice many/most people in the UK don’t deduct the full value of their employee donations on their tax returns, for a few reasons:
because they don’t have to file a tax return. Only ~5 million of the 32 million people in employment in the UK have to file a tax return each year. Most people who are employed and earn under £100,000 don’t need to file.
because of the additional complication of Gift Aid, which lets people transfer some (but not all) of the tax benefits of their donation to the charity that they are giving to. (Alot of people don’t know exactly how Gift Aid works or how it impacts what they can deduct on their tax return).
because they forget/lose track of the donations.
People love that payroll giving just removes the complication of tax entirely.
Differences in tax treatments for donations in different countries is, of course, a big challenge to going international with payroll giving (which a few of the companies who use Tyve have asked us about) is . I’d thought (obviously mistakenly) that the US worked somewhat similarly to the UK. Great to be corrected. It makes it even more interesting to me that the % of people giving through the workplace is so much higher in the US than the UK, given the substantial tax benefits to be had donating this way in the UK.
In the UK, the donation amount is subtracted from gross salary to get to taxable income
That’s very interesting! A lot of people assume that this is how it works in the US, though it isn’t.
Do you have multiple kinds of taxes that you need to pay out of your paycheck? The US does (federal, state, local, social security, medicare, unemployment) and it’s only federal taxes (and a few states, with low limits) where you can deduct donations.
There are two kinds of taxes—income tax and national insurance—and donating to charity only reduces your income tax[1].
I talk a bit about donating through your payroll vs via Gift Aid with some examples in my post here.
To add to Raoul’s point, the government provides a benefit whether you donate via your payroll, or through your post-tax earnings, but donating via payroll:
Is easier for you, especially if you are a high earner, since you don’t have to apply for your tax rebate
Is easier for the charity, they don’t have to worry about Gift Aid
(I’ll do my best to explain. Let me know if anything is unclear.)
In the UK, the donation amount is subtracted from gross salary to get to taxable income. The employer will then use this taxable income to calculate how much tax the employee needs to pay.
For example, an employee earning £5,000 a month and donating £500 a month to charity through Tyve would have their tax calculated on a taxable income of £4,500 (assuming they have no other similar deductions).
Since the employee has captured the tax benefit on their donation immediately (they’ve avoided paying tax on the £500 that they gave), they can’t also list the donation as a deduction on their end of year tax return.
In theory the tex benefit is merely moved forward, but in practice many/most people in the UK don’t deduct the full value of their employee donations on their tax returns, for a few reasons:
because they don’t have to file a tax return. Only ~5 million of the 32 million people in employment in the UK have to file a tax return each year. Most people who are employed and earn under £100,000 don’t need to file.
because of the additional complication of Gift Aid, which lets people transfer some (but not all) of the tax benefits of their donation to the charity that they are giving to. (A lot of people don’t know exactly how Gift Aid works or how it impacts what they can deduct on their tax return).
because they forget/lose track of the donations.
People love that payroll giving just removes the complication of tax entirely.
Differences in tax treatments for donations in different countries is, of course, a big challenge to going international with payroll giving (which a few of the companies who use Tyve have asked us about) is . I’d thought (obviously mistakenly) that the US worked somewhat similarly to the UK. Great to be corrected. It makes it even more interesting to me that the % of people giving through the workplace is so much higher in the US than the UK, given the substantial tax benefits to be had donating this way in the UK.
That’s very interesting! A lot of people assume that this is how it works in the US, though it isn’t.
Do you have multiple kinds of taxes that you need to pay out of your paycheck? The US does (federal, state, local, social security, medicare, unemployment) and it’s only federal taxes (and a few states, with low limits) where you can deduct donations.
There are two kinds of taxes—income tax and national insurance—and donating to charity only reduces your income tax[1].
I talk a bit about donating through your payroll vs via Gift Aid with some examples in my post here.
To add to Raoul’s point, the government provides a benefit whether you donate via your payroll, or through your post-tax earnings, but donating via payroll:
Is easier for you, especially if you are a high earner, since you don’t have to apply for your tax rebate
Is easier for the charity, they don’t have to worry about Gift Aid
If you have a student loan, this is also deducted from your paycheck, and also not affected by charitable donations