Charitable giving and Tax

By Graham | December 10, 2022

Many people give money to charity, however, only half of them are taking advantage of the Gift Aid scheme. Let’s consider how a taxpayer can donate to charity tax-efficiently.

Giving through Gift Aid is a very popular and tax-efficient way of making gifts or donations to UK registered charities and also to local, community amateur sports clubs. Gift Aid can only be claimed on donations made by UK taxpayers: this is because Gift Aid is a repayment of the UK basic rate Income Tax (20%) a UK taxpayer paid on their gift. Instead of the tax being repaid to the taxpayer, it’s repaid to the charity.

Charities can claim an extra 25p for every £1 donated. For example, if you donated £100 to your charity, you could claim Gift Aid and the charity will receive a gross donation of £125.

To add Gift Aid to a donation you must fill out a Gift Aid declaration form for each charity.

Beware: if you have not paid at least the amount of tax that the charity will claim, HMRC will charge you the difference in income tax.

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Higher Rate 40% and Advanced Rate 45% taxpayers

Using the Gift Aid scheme is particularly beneficial to these taxpayers.

They receive additional tax relief personally, by extending the basic rate band by the amount of the grossed up donation. For example, Graham is a 40% taxpayer and he donates £1,000 to his chosen charity. The charity will claim the Gift Aid of £250 (20%) which will result in a gross donation £1,250. Graham’s basic rate band will be extended by £1,250 which will result in a tax saving for him at 20% of £250.

There’s a further benefit, because In addition to extending the basic rate band, the gross Gift Aid donation is deducted when looking at the level of your income for personal allowances purposes. Between £100,000 and £125,000, the effective rate of tax is 60% because the Personal Allowance is progressively withdrawn at this level. Taxpayers whose income reaches into this band but not above it receive an effective 40% benefit.

For example, Peter’s gross income is £120,000. He donates £1,000 to his chosen charity. The charity will claim the Gift Aid of £250 (20%) which will result in a gross donation £1,250. Peter’s basic rate band will be extended by £1,250, and he will keep an additional £625 of Personal Allowance which will result in a tax saving for him at 40% of £500. The charity received £1,250 at a cost to Peter of £500; HMRC paid the rest.

Carry back

It is possible for an individual to carry back Gift Aid donations made in the current tax year to the previous tax year. However, once the tax return is submitted for that year it cannot be amended. This can be helpful if you were a higher rate taxpayer in the previous year but a basic rate taxpayer in the current year; or if perhaps it would allow for your personal allowance to be reinstated in one year but not the other.

Gifting land, property, and shares to charity

Individuals can claim a deduction against their taxable income when gifting qualifying investments to charity, which includes certain types of shares, securities and land. This can also apply to an individual who sells the qualifying investments to a charity for less than the market value. In addition to the relief, the gift is also exempt from Capital Gains Tax.

Let’s look at another example. Kate is an additional rate taxpayer and has shares that cost £5,000 with a market value of £10,000. She gifts the shares to a charity. The 20% capital gains tax saving on the £5,000 gain is £1,000 and the 45% income tax relief on the total gift is £4,500. So, Kate’s after-tax cost for the £10,000 gift the charity received would be £4,500.

There are special rules to prevent this relief being used for tax avoidance purposes, and it is not possible to carry back this relief to the previous tax year.

HMRC has different ways to give tax relief on charitable donations. Sole traders, partnerships and limited companies all have their own rules.

It’s important for you and the charity that you understand the rules that apply to your business structure – to make sure no one’s missing out.

Sole Traders and Partnerships

Charitable donations aren’t tax-deductible for sole traders and partnerships. Any gift of money from a business bank account will be treated as personal drawings. HMRC treat it as an individual donation, which is tax free.

Employees and Payroll Giving

Donate straight from your salary using a Payroll Giving Scheme, through PAYE, before income tax is deducted. This is only for donations to charities.

Wills and legacies

Leave items, property and money to charity in your will. If you leave 10% or more of your assets to charity, then your rate of Inheritance Tax will be reduced from 40% to 36%. Or, these donations could be taken off before Inheritance Tax is worked out, lowering the overall bill.

Limited Companies

Charitable donations are tax-allowable expenses for limited companies, unlike sole traders and partnerships. Donations can only reduce profit. If you’re making a loss, you can’t include them in your allowable expenses, or use a charitable donation to take you into a loss-making position.

As a limited company, you can also claim tax relief on donations to charity other than money, such as:

You can send employees to work for a charity and still pay their wages through PAYE. This is known as secondment and is a great way for charities to benefit from your staffs’ expertise.
Sponsorship is a mutually beneficial exchange, so it isn’t the same as a donation. You need to make sure the sponsorship payments qualify as a business expense.
Full Capital Allowances are available on any equipment you donate that’s been used by your business.
Donating property, land or shares in another company means that you don’t pay tax on any capital gains and you can obtain tax relief on the market value of them against your business profits.

If you’d like tax advice on giving to charity please contact us today.