On why specifically something silly I was doing was silly.

While I was at university I didn’t have a lot of money. I knew that once I started earning money I would want to give some of it away. So I committed to giving away 1% of my income to get a habit going. Income at the time was mostly below taxable thresholds, so I didn’t have to decide between pre- and post-tax income

Once I started working full time, I initially stuck to the 1%, not feeling that I could give more. I decided that should be pre-tax, since that made the most intuitive sense. Then, I gradually increased that upwards, until I ended up at “pre-tax income/1000 per month”, which isn’t very sensible but I felt comfortable with the resulting amount. It was good to have a specific rule so that I didn’t have to think about how much to donate each month, even if the rule was strange.

Recently, I was thinking about adjusting my target upwards again and realized that there was a subtle, but meaningful issue with my existing target: It was setting how much money would come out of my bank account each month, not how much the charity would receive. Let’s call that an outflow-based donation target.

I am based in the UK and I currently donate using GiftAid. This is a scheme where you can deductyour donation amount from your income tax. Some of the income tax you would have paid is refunded to you, some of it is given to the charity. See here for a calculation example, if you’re really interested.

Given an outflow-based donation target, this detail doesn’t really matter. I make sure to tick the box in the donation form that allows the charity to claim GiftAid, but I don’t really care about the amount. Also, at the end of the tax year, I might receive a tax refund for some of my donation, which is a nice bit of cash, but again, I don’t particularly care about the amount.

The fact that I’m indifferent here, shows that the incentives are messed up. For one thing, targeting a specific momentary outflow leaves me indifferent to actually ticking the “GiftAid this donation” box, even though it makes a big difference for the charity. Also, I might be tempted to run my donations through credit cards with high cash back, which would make the charity foot a higher interchange charge.

Instead, I should set a target in terms of the money actually received by the charity, an inflow-based target. That way, I calculate how much the charity receives after gift aid, and make sure to donate the right amount to achieve that. Second, since I can claim some of my donations against my income tax, it’s more reasonable to define my target in terms of my pre-tax income, since that’s the pot I’m allocating from.

After I realized that I needed to make these changes, I did more research into how to structure my donations to minimize the cost to myself while hitting a particular target1. I reduced the cost by ~7% (compared to GiftAid donations) which in turn made me more comfortable with a higher target.

  1. If you’re interested: I think my best bet is salary sacrifice, if I can persuade my employer to donate the saved employer NI contributions in addition to my donation. ↩