Payroll Giving Explained

Payroll Giving is a tax-relieved way for employees to donate to charity directly from their pay, or from a pension, before Income Tax is taken off. The relief is immediate and at the donor's own tax rate, but only if the employer or pension provider runs a scheme.

How does Payroll Giving work?

Payroll Giving deductions must be paid through PAYE. The donation is taken from pay before Income Tax but after National Insurance, so the donor still pays National Insurance on it but no Income Tax. The tax relief depends on the rate of tax you pay. According to GOV.UK, to donate £1 a basic-rate taxpayer pays 80p, a higher-rate taxpayer 60p and an additional-rate taxpayer 55p. The figures are different in Scotland: from 81p for a starter-rate taxpayer to 58p at the higher rate and 52p at the top rate.

So if you are giving £20 a month and you are a higher-rate taxpayer, the donation costs you £12 in take-home pay. Because the relief is given at source, there is no need to claim the difference between higher and basic rate through a tax return, as there is with Gift Aid.

Who can use Payroll Giving and who runs it?

The employer needs to set up and run the scheme. It contacts a Payroll Giving agency approved by HMRC, makes the deductions each time it runs payroll, and sends the donations to the agency, which passes them on to the charities each employee has chosen. The charity must be recognised by HMRC and use the money for charitable purposes. You cannot give to a community amateur sports club through Payroll Giving.

Agencies may charge an administration fee, usually deducted from donations before they reach the charity. An employer can choose to pay the fee so that charities get more, and can deduct the costs of running the scheme from business profits before tax.

Pensioners can use Payroll Giving too, if their company or personal pension provider runs a scheme: the donation comes out of the pension before tax in the same way. Employees and pensioners should ask their employer or pension provider whether a scheme exists. Questions about joining, changing or stopping a donation can be put to the employer or its agency.

Payroll Giving or Gift Aid?

A charity cannot claim Gift Aid on Payroll Giving donations, so the same gift cannot benefit from both. With Gift Aid, the donor gives from taxed income, the charity reclaims 25p for every £1, and a higher-rate taxpayer claims extra relief through Self Assessment or a change to their tax code. With Payroll Giving, all the relief is given at source.

Payroll Giving isn't the only option. It suits regular giving through the year without forms or receipts, while Gift Aid works for one-off gifts to any charity that can claim it, whether or not an employer runs a scheme. A donor can use both, for different gifts. Check with your employer or pension provider first; if there is no scheme, Gift Aid is the usual route.