What does the budget mean for charities?

We highlight some of the key considerations for the charity sector.

Labour revealed its long awaited budget on 30^th October 2024 (read the full budget document). Charities were mentioned very little in the budget with some in the sector describing it as a ‘missed opportunity’. Nevertheless, charity trustees should be aware of the changes, especially when reviewing their financial projections for the coming years, and seek help where necessary.

Some of the key changes which will or could affect charities include:

VAT on private school fees and business rates charitable relief

As expected, Rachel Reeves announced that the government will be introducing 20% VAT on private school fees. This includes boarding services provided for a charge by private schools. The changes will be implemented from 1^st January 2025, although anti-forestalling measures will apply to some payments made in advance (including retrospective application from 29^th July 2024).

It was also announced that the government will be removing business rates charitable rate relief from private schools in England from April 2025.

This will have significant implications for private schools, and there is a relatively short time until these changes are implemented.

It is worth noting that there are some additional provisions and exemptions which relate to pupils with an Education, Health and Care Plan (EHCP). For example, local authorities will be able to reclaim the VAT charged on those pupils’ fees in some circumstances, where the school is named in the EHCP.

The government estimate these changes will raise £1.8 billion per year by 2029-30. They have stated this source of funding will help them stay committed to their promises and to ensure every child has access to high-quality education. The government states that the impact on the state education system “is expected to be very small” as a result of these changes.

Responses to the charity compliance consultation

In the budget, the government announced that they will “support charitable giving by legislating to prevent abuse of the charity tax rules, ensuring that only the intended tax relief is given to charities”. This is in response to the charity compliance consultation that was launched in April 2023. Read the government’s response here.

The following change will be made in 2025:

1. ‘Fit and Proper Persons Test’ – the definition of who is not a ‘fit and proper person' will be extended to include those individuals who persistently fail to comply with tax obligations. This will include those that fail to file returns on time.

The following changes will take effect from April 2026:

2. Charitable investment rules – there are currently twelve investment types that are recognised for charitable tax relief purposes. Currently, only Type 12 (loans and other investments) need to be made for the benefit of the charity. From April 2026, all twelve of the investment types will have to be for the benefit of the charity and not for the avoidance of tax.

3. Tainted Charitable Donations Legislation – this legislation was originally brought in to prevent the abuse of the tax reliefs to donors and charities. If a donation is ‘tainted’ then the donor is not able to claim tax relief on it, or on any associated donations. Currently, there are three conditions that must be met for a donation to be a tainted charity donation.  In the government’s response they say the bar to challenging a transaction will be lowered. The government will also be introducing an ‘outcome’ test to replace the current ‘motive’ test. This will allow HMRC to look at a series of transactions and not just a single transaction.

4. Attributable income – the government will be legislating to bring legacy income into the attributable income definition.

Social housing

The government has pledged a £500 million boost to the Affordable Homes Programme to assist in building affordable housing.

A consultation has also been launched regarding a new long-term social housing rent settlement of 1% above the Consumer Price Index for 5 years. The government have said they will also consider if any further measures could be implemented. This is meant to provide certainty for social housing providers so that the sector has “confidence to build tens of thousands of new social homes”.

National insurance contributions

It was announced that national insurance contributions for employers would increase – a jump from 13.8% to 15%. As a small comfort, the employment allowance also increases from £5,000 to £10,500. Despite this good news, the increased national insurance contributions are likely to squeeze budgets, especially if a charity employs a lot of staff.

The government announced support for the public sector for meeting these increased costs, however the voluntary sector was not mentioned. NCVO and ACEVO leaders have written an open letter to Rachel Reeves to convey their disappointment at the lack of support for the voluntary sector, and to clarify whether any support will be given. Read the letter here.

National living wage

The national living wage will increase to £12.21 per hour from April 2025, an increase of 6.7%. The government also aims to remove the bands of pay and create a single adult wage rate. From April 2025, the national living wage for 18–20-year olds will be £10 per hour, an increase of 16.3%. While good news, these increases have the potential to squeeze budgets for employers.