Every year, we Brits donate billions of pounds to charity. How do these donations affect our tax? This blog explores tax efficient charitable giving.
Gift aid
Charities will almost always ask donors to fill out a “gift aid” declaration. This allows the charity to claim 25% of the donation from the Revenue, being the tax the individual has suffered before making the donation. For example, if Jim earns £10 gross, 20% tax (£2) is deducted and paid to the Revenue and Jim receives £8 which he donates to Oxfam. As he has completed a gift aid declaration, Oxfam will claim back 25% of his donation, £2, from the Revenue, which is equal to the tax paid.
If you are asked to complete a “gift aid” declaration, do make sure the amount of tax you pay in the year will be equal to or exceed 25% of the donations you are making. Otherwise, the Revenue will ask you to pay the shortfall.
Sole-Traders and Partnerships
Charitable donations are not tax-deductible expenses in the accounts. However, you may pay money to a charity and receive benefits in return, such as promotions or advertising, which is a tax deductible expense. Advertising may cover traditional forms like an advert in the charity’s newsletter, or a banner at a fundraising event. Payment to a charity would also be classed as advertising if the charity links their website to yours, let you use their logo in your printed material, publicly endorses your products or allows you sell goods at their events.
If you are looking to support local charities (and save tax), you may find it useful to approach suitable small, local charities to see if you are able to pay them for advertising in some manner.
Donations to registered charities are tax deductible in a company’s accounts. Charities cannot claim gift aid on donations from companies, as the company has benefited from tax relief on the donation.
If you are a basic rate tax paying director/shareholder receiving more than £5,000 in dividends each year, due to the dividend taxation changes it would most likely be financially advantageous for your company to make charitable donations rather than you personally. Consider the effects of a £10 company profit either being donated to charity by the company, or the net amount being donated after being paid out to the shareholder as a dividend:-
| If Donated By Company | If Donated By Shareholder | |
| Amount of donation | £10.00 | £7.40 |
| Tax payable by company/shareholder | £0.00 | £2.60* |
| Charity receives (including gift aid) | £10.00 | £9.25 |
| Net cost to the business/shareholder | £0.00 | £0.00 |
*Assuming the £5,000 tax-free band for dividends has already been used
As can be seen, the charity stands to gain if company donations are made rather than by the individual. This does not apply to higher rate taxpayers, due to the following:
Higher rate tax payers
If you are a higher rate taxpayer, make sure you let us know how much you have donated to registered charities during the tax year when we come to prepare your tax return. Charitable donations increase your basic rate tax band thus reducing the amount of higher rate tax you pay.
We hope the above information has been helpful to you. Individual circumstances vary so, please get in touch with us (Southside Accountants Wimbledon) first before relying on the above advice.
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