How does Payroll Giving reduce my tax bill?

Full answer

Payroll Giving (also called 'Give As You Earn') is a workplace scheme that gives an important practical advantage over Gift Aid for donors who pay tax above the basic rate: the correct amount of tax relief is given automatically and immediately, with nothing further to claim. **How it works** If your employer runs a Payroll Giving scheme (via an approved Payroll Giving agency), you nominate a regular donation amount that is deducted from your salary BEFORE Income Tax is calculated -- similar in mechanism to a net pay pension contribution or salary sacrifice. Because the donation reduces your taxable pay before tax is worked out, you automatically get relief at your full marginal rate through payroll, with no separate claim needed. **Comparison with Gift Aid** Under Gift Aid, the charity claims back basic rate tax automatically, but if you are a higher or additional rate taxpayer, you must separately claim the additional relief above basic rate through Self Assessment (or by asking HMRC to adjust your tax code) -- and if you forget to make that claim, you simply lose the extra relief. Payroll Giving avoids this problem entirely because the full marginal-rate relief is baked into the payroll calculation from the start. **Worked example: basic rate taxpayer** An employee earning £35,000 donates £20 a month via Payroll Giving. Because this is deducted before tax, her taxable pay each month falls by £20, saving her 20% x £20 = £4 in tax she would otherwise have paid -- so the true cost to her is £16 net, and the full £20 goes to the charity. **Worked example: higher rate taxpayer** An employee earning £70,000 (higher rate taxpayer) donates £100 a month via Payroll Giving. Because it comes off gross pay before the 40% higher rate tax is calculated, he saves £40 in tax automatically -- true net cost £60, with the full £100 reaching the charity, and no need to remember to claim anything via Self Assessment, unlike if he had used Gift Aid instead. **Availability depends on your employer** Unlike Gift Aid, which any individual taxpayer can use regardless of employment status, Payroll Giving is only available if your employer has set up an approved scheme with a Payroll Giving agency -- self-employed people, and employees whose employer does not offer the scheme, cannot use it and should use Gift Aid instead. **Why this matters for higher earners** For higher and additional rate taxpayers who are disciplined about donating regularly, Payroll Giving removes the administrative risk of forgetting to claim the extra relief through Self Assessment that comes with Gift Aid -- though Gift Aid remains more flexible for one-off or irregular donations, and for donors whose employer does not run a Payroll Giving scheme at all.

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