Payroll giving

'Payroll giving' is a way of giving an amount of money each week or month from your pay. It is a tax-effective way for employees, non-executive directors and those receiving a company pension to give a regular amount to one or more charities directly from their income. It can also be used for a one-off gift.

The donation is made from your gross salary (before tax has been taken off). This means you receive tax relief immediately on the value of your gift. Another way of looking at it is that the money you would have paid in tax goes to your chosen charity.

An increasing number of companies offer the scheme, and some will match the donations of their staff. This could significantly increase the value of your gift. Even without that incentive, payroll giving is for most people in regular employment or receiving director's fees or a company pension the most cost-effective way of giving.

For example, if you make a pledge of £10 a month and you pay 22% tax, the tax relief at that rate is taken from your original donation of £10, so the cost is £7.80 a month. If you are a 40% taxpayer, £4 will be taken from the £10, so the cost to you is £6 a month.

The value of your donation will be taken from the calculation of your income before tax.

• If you are a basic-rate taxpayer, the tax relief is 22% of £1000, or £220, and the net cost to you is £780.

• If you are a higher-rate taxpayer, the tax relief is 40% of £1000, or £400, and the cost to you is £600.

In our example, a basic-rate taxpayer could make a donation of £1000 over five years at a yearly cost £156 (£780 ÷ 5). This is £13 a month. If you are a higher-rate taxpayer, a donation of £1000 could cost you as little as £120 a year (£600 ÷ 5) - equivalent to £10 a month - over the next five years.

If your company will match your donations, the charity will benefit even more.

You can also use payroll giving to make a one-off donation, although you have to set up the system in the same way. As we saw, you can use Gift Aid to make regular payments as well as one-off donations. (See the section on Gift Aid for more information.)

Once payroll giving is set up it is simple for the donor and for the charity. Changing the amount or destination of the donations should also be straightforward.

The process for payroll giving:

• If you are a UK taxpayer receiving a salary or pension through PAYE, your company is eligible to offer a payroll-giving scheme. They will do this is association with a payroll-giving agency. This is a charity that collects donations from several employers and distributes them to the chosen charities. Give as You Earn is run by the Charities Aid Foundation, a leading agency, and there are several others.

• The payroll-giving agency will charge an administration fee each month. This will be taken from the donations the charity receives. This fee is sometimes paid by the employer. Fees vary, but are usually about 4%. This does reduce the amount the charity receives, but as all the administration is handled by the payroll-giving agency the charity's expenses are less for this process than for Gift Aid, so it is cost-effective for the charity. The agency may hold on to the money for up to 60 days.

• To take part in the scheme, all you have to do is ask your employer for a charity nomination form. This gives your employer the authority to make the deductions from your pay or pension, and sets out how much you want to give, and to which charity or charities. The donation will be taken from your salary after working out National Insurance contributions but before working out PAYE. It will be handled automatically by your payroll administrator. You may change the size of your donations or the charity, or stop at any time, simply by telling your employer.

• If your company does not provide a payroll-giving scheme, you might consider encouraging them to set one up. HM Revenue & Customs produces a simple guide which describes how the scheme works from the point of view of an employer (P/PG/1 'Payroll Giving - a Guide for Employers'). Also, the charity you want to support may be experienced in payroll giving and be able to give you expert advice.