Why we should abolish tax relief on charitable giving

I have just received a letter from my old university. It asks me to send money (as usual). And it adds "every £10 donated is worth £12.50 and the difference is paid by the Inland Revenue at no cost to you".

No cost to me? I don't think so.

Let's assume that I am a 40% taxpayer. I give £1,000 to a charity. The government is then obliged to hand over another £250 in Gift Aid, bringing it up to £1,250. I then make a claim for charitable giving tax relief on my tax return for another £250.

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

The net result? The UK Treasury has £500 less in the coffers than it would have had had I not made my charitable donation. That's a cost not just to me but to all taxpayers. You might say that doesn't matter. The point, you might say, is that the charity now has £1,250. But I think it does matter.

I wrote an editorial on this last week (subscribers can read it here). The key point is that the government has core responsibilities that must be paid for out of tax revenues. Every penny that goes out in tax relief is a penny not being used to pay for the NHS, for education, for defence and so on.

You might think that your chosen charity is more important than anything the government spends money on. I don't think that should be your choice to make. The rest of us don't get to effectively hypothecate our tax payments (ie, decide what our tax money is spent on directly), so why should those who can afford to make large charity payments get to hypothecate theirs?

It makes no sense. If you want to give to charity, you can. Just pay your taxes first. Otherwise the rest of us end up having to pay them for you: every £500 the Treasury loses as a result of a £1,000 donation has to be made up by other taxpayers. That adds up.

According to the HMRC, "Gift Aid is worth nearly £1bn to charities and their donors." If we all made our charitable donations out of our post-tax income, that would be £1bn returned to the Treasury every year and £1bn every year off our hideous budget deficit.

George Osborne is right to be trying to limit tax relief on charitable giving. But to my mind, he should go further. He should abolish it. And when he has done that, he should take a long look at charitable status and who should and shouldn't have it, starting with pretty much every arts organisation in the country.