Payroll Giving – how to set up tax free charitable donations for your employees

During the pandemic, charities that traditionally relied heavily on fundraising events, such as sponsored walks, galas and shows, felt the pinch as these were deferred or cancelled. Revenue streams from regular donations provided by individuals and companies became more important than ever in ensuring charities could continue to provide their crucial services.

Many charities across the UK rely solely on donations from companies and individuals to operate. In fact, charities receive very little in the form of government grants and those that are lucky enough to receive such funds get a very small amount. Supporting worthy causes through Payroll Giving is a great and convenient way for individuals to donate to their favourite charities and for charities to receive funds without having to claim tax.

What is Payroll Giving?

Payroll Giving allows employees to make contributions to a charity of their choice without paying tax on the donated amount, making it an extremely tax efficient way to give.

Payroll Giving – how to set up tax free charitable donations for your employees

Donations are taken from pay after National Insurance but before tax. Therefore, a donation of £5 per month would actually cost an employee £4 from their take-home pay (if they paid 20% tax) or £3 (if they paid 40% tax).

Giving to charities in this way also makes it far easier for them as they will not need to claim the tax back after receiving the funds.

How do you join the Payroll Giving scheme?

Your employer will need to set up and run the scheme. To do this, employers will need to contact a Payroll Giving agency. These agencies are all approved and monitored by HMRC for Payroll Giving purposes.

How does an employer operate Payroll Giving?

Once the scheme has been set up, employers will need to deduct the relevant amount (chosen by the employee) each time they run the payroll. The donation will be taken from the employee’s pay before tax but after National Insurance.

The donations should then be sent to the appointed agency and they will pass them onto the chosen charities.

How much does it cost to run a Payroll Giving scheme?

Agencies may charge an administration fee to process donations. This will usually be deducted from employees’ donations before the funds are passed to the charity. Alternatively, the employer can choose to pay the fee instead so that the charity receives more money.

An employer can deduct any costs of running the scheme from their business profits before tax.

How do charities ensure they receive funds from Payroll Giving?

In order to qualify for donations via the Payroll Giving scheme, charities must be recognised by HMRC and use the donation for charitable purposes. For more information, visit HMRC’s website here.

Charities cannot claim Gift Aid on Payroll Giving donations.

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