All About Earned Income
What is earned income?
Earned income is an important part of the way in which charities raise funds, but there are often questions around what falls under ‘earned income’ and what exactly a charity can do to generate income through this form of trading.
Earned income, or ‘primary purpose’ trading, is money that a charity earns for providing goods or services. Profits are applied for the purposes of the charity only and charities do not have to pay tax on profits made from earned income. It's different from funds received through donations and fundraising (voluntary income) because the person or organisation giving the funds to the charity is receiving something in return. So, while it is not subject to tax, you cannot claim gift aid on this type of income.
When looking at a charity’s Trustees Annual Report and Accounts ‘Earned Income’ will generally be categorised as ‘Charitable Activities’ on the Statement of Accounts.
What sort of services can be considered as earned income?
To fall under earned income, services provided in returned for income must be in line with the charity’s objectives, to support the charity in achieving their mission. Examples are an arts charity receiving funds through ticket sales and gallery events, or a charity supporting individuals by selling goods or services to help support those individuals, such as therapy or assistive devices. Any trading that falls outside of a charity’s objectives or primary purpose is not earned income and is considered trading, which might require a trading subsidiary depending on the level of trading a charity carries out (more on this on a future post!).
Earned income can come from a variety of sources, including contracted work with a local authority, from individuals, companies or through membership subscriptions.
How much of the sectors income comes from earned income?
The 2020 UK Civil Society Almanac reports that earned income accounts for 50% of the sector’s total income. Earned income from the public, including fees for services such as membership subscriptions and trading activities such as charity shop sales, grew by 3% to £12.6bn from the previous year.
The impact of coronavirus on Earned Income
“Worryingly in the context of coronavirus, a notable proportion of this growth has been from earned income from the public – precisely the area that is most vulnerable to the effects of social distancing restrictions” says NCVO chief executive Karl Wilding.
If you consider that the provision of services and tickets sales make up a vast proposition of this, the impact of covid-19 is set to have a massive impact on earned income. This is alongside the lack of funds from charity events and other aspects of public fundraising. Charities have reported that they are expecting a 24% reduction in total income for the year, which equates to a £12.4 billion loss in total.
This is all at a time when the need for charity’s services are more important than ever. Spending on front-line services has remained steady, with 70% of organisations either improving or sustaining expenditure despite the falls in cash, reserves, donations and grants, according to ACEVO.
I’ll be thinking about the impact of coronavirus and the importance of diversifying income in future blog posts, as well as how earned income can play an important role in a charity’s income. More on that to come soon!