How I Heard a Priest's Tax Confession
(Below the article are 2 comments from the priest after he read it)
No one is above the law. HMRC will demand explanations from everyone regarding undeclared income, both local and foreign.
Some time ago, I had an unusual client: a priest who had been living in the UK for many years and asked us to help him sort out his financial situation.
Father Piotr has been living in the UK since 2008 and, from what he told me, had not been correctly declaring his income to HMRC until now. As the tax authority has the right to trace an individual's tax history up to six years back, we began rectifying the priest's taxes starting from the 2015/16 tax year.
The clergyman receives a small salary from the parish and occasional donations from parishioners. The parish provides him with accommodation, food, and a car. Additionally, the priest regularly works as a prison chaplain, which also brings him a modest income.
In addition, the priest earns income from Poland: this includes rent from an apartment and income from bank deposits and savings accounts.
Father Piotr is registered as self-employed in the UK. In his tax returns, he only declared income earned in the United Kingdom.
Tax Residency
As a UK tax resident, Father Piotr should declare all his income, including income from Poland, in the UK, applying the provisions of the Double Taxation Agreement (DTA). Therefore, it was clear from the outset that the priest should submit a so-called disclosure, which is the equivalent of a "voluntary disclosure" in Polish law. This is a document in which we admit to the tax authorities that we have committed a tax offense. This document can significantly reduce a potential penalty, or even lead to it not being imposed at all. You can find additional information on our website.
How Clergy Pay Taxes in the UK
Clergy in the UK are typically taxed as employees and registered under the PAYE system, meaning they receive payslips. If, however, they are not employees under an employment contract, all income received is considered income from self-employment (self-employment). As of April 2016, the earnings of all employees, regardless of their amount, are fully taxable. However, the taxation of some lower-income clergy still follows the old rules.
Low-Paid Clergy
A low-paid cleric earns less than £8,500 annually. To check if our priest's earnings fall below this threshold, all income from employment (excluding tax-exempt amounts) and income arising from car use must be added together (if a cash alternative is offered instead of a car, and this alternative is lower than the cash equivalent of the benefit calculated according to normal rules – more on this can be found in our other article – here). Then, we deduct all allowable deductions for employment obligations, which may include: costs of official foreign travel (including accommodation and subsistence), salary donated to charity, and pension contributions. We calculate Father Piotr's earnings rate using the formula: (R x Y) : E
'R' is the sum of allowable deductions, 'Y' is the number of days in the year, and 'E' is the number of days in the year during which employment lasted. If employment lasts only for part of the year, the full-time equivalent annual amount must be calculated. However, in the case under consideration, the priest works part-time, so the earnings rate is determined based on actual part-time remuneration, not the annual equivalent.
If calculations show that the cleric has low earnings (a rate less than £8,500 annually), then only certain parts of the benefits code apply, and many benefits (including those related to company car use) can be enjoyed tax-free.
Deductible Expenses
In the HMRC publication, concerning employment income, there is a separate list of deductible expenses specifically for clergy. This includes travel costs incurred while performing duties or during necessary attendance, expenses for using one's own car, repair or replacement of vestments worn for services according to ecclesiastical law (this does not apply to attire worn on other occasions), provision of a so-called locum tenens (a temporary administrator in cases where the priest cannot perform their duties), expenses related to celebrating mass and religious rites (e.g., wine supply), as well as some household expenses like heating and cleaning.
Amounts provided by the Church for heating, lighting, and cleaning are also exempt.
Offerings from the faithful are not exempt (based on the case of Cooper v. Blakiston, judgment of 10 December 1908).
Income from Poland and Residency in England
Regarding the taxation of income earned in Poland, we relied on the Double Taxation Agreement (DTA) (Polish version here), which was established based on an international convention called the Multilateral Instrument (MLI). The outstanding tax payable in the UK for previous years will be reduced by the tax already paid in Poland.
Self-employment or employment?
It is possible that after making the disclosure HMRC will not accept that Father Piotr is self-employed, as the Church provides him with accommodation and a car. If the clergyman is deemed an employee, he will have to pay tax, as both the car and the expenses incurred for its maintenance and use will then be treated as employee benefits, which are subject to taxation. You can learn more about how to determine if you are self-employed or simply an employee from this article.
Comment 1
Thank you for the email and the article. I really like the title - 'How I confessed a priest' hehe...
I have no reservations about the article, and it will certainly help some group interested in the topic and provide the right direction in approaching the subject.
My comment: However, I have an internal conviction, also having read other articles - especially from England - that the matter is still complicated. Most articles and HMRC comments concern full-time employed Vicars, who have good salaries and some additional benefits from the parish and parishioners.
The situation for Catholic priests is a bit different. Most of them fall into the income bracket below £8500 and don't have to worry about other tax matters. If, however, they exceed this, because they have income from chaplaincies, from Poland, or from academic work, then the matter becomes complicated, especially not just regarding the taxation of these additional incomes, but how to account for accommodation, a car, heating, and often food, which they also receive from the parish. I've heard of priests who don't want to 'bother' with this and don't take on additional work because of the complications involved. The issue would probably be resolved by a normal, decent salary, and then the priest would pay for his own accommodation or car. Currently, the parish stipend for a priest is £260 per month, plus accommodation and a car, because he wouldn't be able to afford it himself on such a salary. The priest can earn the rest from offerings, work in chaplaincies, etc., but it all depends on the parish he has and where he works. There are places where he can easily have many such ministries, but there are also places where he cannot count on such income.
Comment 2
David, if you think it's worth adding, I'll leave the decision to you. If you publish it, it's probably worth adding that the Catholic Church operates differently in various countries. In some countries, a priest receives a regular salary, e.g., Germany, Switzerland. There, the Church, like other charitable organizations, has something like a 1% allocation in tax returns, and this is transferred to the respective church, and from that, funds are provided for priests and the maintenance of churches. However, these are not government funds, but come from people who have chosen to pay this additional tax because they identify with it. So, it is also an offering from their side to the church. I have feedback from priests in Germany that many of our compatriots opt out of this tax, because annually, even if it's 1% (I don't remember exactly), it's a sum that can be saved for themselves. There is no obligation to pay it.
In Poland and the UK, a priest receives only rather modest support; it is assumed that the faithful will take care of the priest by thanking him for his ministry, such as baptisms, funerals, and Holy Masses. Church precepts remind us of the need to care for the needs of the church community, and that is how it is understood.
Sacraments or prayers are not sold; occasional offerings associated with them are actually for the upkeep of the church we use and for the priest's sustenance. These offerings are not for prayer, and not everyone understands this.
Should priests be on a regular salary or rely on offerings from people? That's a question your readers might ask themselves. However, it's important to remember that even if they were on a salary, someone would have to establish and regularly maintain such a fund so that full-time employees (and here we're talking about priests) could truly dedicate themselves to their work and be available as expected.
Personally, I'm fortunate because I have a supportive family, resources in Poland, and thanks to additional specialized studies, I've been a prison chaplain for 8 years, which provides me with a regular income. Although that will end soon, as we have changes from time to time. But a few years ago, I was in a parish in England where I worked for a couple of years, and my income was around £250 plus perhaps £100-200 in offerings per month.
It's interesting to note that in all studies, priests – treated as an employee group – rank at the very top in terms of work motivation and job satisfaction. So, financial matters are not the most important when undertaking this type of work.
Abuses, etc., I'll leave uncommented, Dawid, because, as everywhere – whether in politics, charities, or business – such situations are a fact, but this doesn't change the meaning and value of the good work and mission of those organizations. Usually, it's a problem of specific individuals. But as a well-known philosopher once said, to judge a group or a religion, one must look at those who faithfully follow its path and at the fruits in their lives, not at those who, through their actions, effectively contradict its ideals.
