The recent UK budget arguably represents a mixed bag for the charity sector. Here we take a closer look at the key changes, how they directly affect charities, and what they might mean for the future of sector, both in the UK & internationally.
Increased National Insurance contributions
A significant shift introduced in this budget is the £40bn rise in National Insurance contributions, with the bulk of the increase targeted at employers. For charities, this change may prove particularly challenging. Unlike businesses that can adjust pricing strategies to offset cost increases, charities are more constrained. For many, rising employer National Insurance costs will need to be met either by tapping into reserves or reallocating funds from frontline services. We would flag that this could force difficult decisions, especially for those already under pressure from inflation and rising demand for services, and many are already calling for exemptions or targeted relief.
Corporate tax rise and incentives for charitable giving
The budget also includes a significant corporate tax increase, which means businesses will face higher operating costs. Some have pointed out that this also presents an opportunity for corporations to leverage charitable donations as a means of offsetting these new tax burdens. Talking with a couple of small charity CEOs, however, this hypothesis is greeted with a certain amount of scepticism. Tax rises may lead to increased corporate giving but it is likely that companies will prefer to support causes closely aligned with their brand or widely visible issues that resonate with consumers and shareholders. These small charity CEOs fear that while charities working in popular areas may indeed benefit, their more particular causes might not see the inflows in the same way.
Social impact investment vehicle
One of the most forward-looking elements of this budget is the creation of a new social impact investment vehicle aimed at attracting private capital to fund social causes. This initiative signals a shift towards sustainable financing and opens doors for charities to engage with private investors and gain access to more robust funding channels, potentially easing reliance on traditional grant funding.
However, charities looking to tap this supply will also need to prepare to meet investors’ expectations on measurable outcomes and a data-centric approach to reporting. This will tilt the funding landscape in favour of those hose charities able to demonstrate tangible returns. While this evidently will support accountability across the sector, such data & measuring activity is something that creates extra overheads. For some, more funding will perhaps have to be sought to implement these changes, before more funding again becomes available.
Inheritance tax and legacy giving
Charities have long relied on legacy giving as a steady revenue stream, and this budget’s commitment to inheritance tax relief for charitable bequests is a welcome continuity. The incentives allow a portion of estates to go tax-free if left to charities, which could encourage more donors to consider charitable giving as part of their legacy planning. For charities focused on long-term strategic projects such legacy gifts are invaluable and their continuation should prove a welcome relief.
Domestic funding vs. international aid
While the budget has highlighted social priorities domestically, we would note that there is a notable lack of increased funding for Official Development Assistance (ODA). For international charities, particularly those working on climate change, gender equality, and health in the global south, this represents a setback. Without the hoped-for boost in ODA, charities reliant on government funds for international development projects will need to seek alternative funding sources or scale down certain initiatives. The focus on domestic issues in the budget meanwhile may encourage some UK-based international charities to reallocate resources toward local projects, potentially limiting their global reach if revenue is not diversified.
VAT and regulatory reforms: missed opportunities?
Some in the charity sector were hoping for VAT reforms, particularly around zero-rating on essential goods and services for charities. However, the budget did not address this, which perhaps represents a missed opportunity to ease operational costs. Similarly, there was limited mention of regulatory relief or simplification, both of which could significantly reduce administrative burdens for charities, freeing up resources to focus on programme delivery.
Navigating the path forward
In summary, therefore, this budget arguably represents a mixed bag for charities. It has laid the groundwork for new avenues of funding and potential growth in social impact investment but has also introduced considerable challenges as well. Needing to carefully navigate the increased costs of employment, the continuing demands on their services, and the pressing need for strategic funding partnerships, charities now more than ever are being asked to innovate and collaborate in new and unusual ways. An acceleration of an existing trend, rather than any succour for those in the sector.