Every year, the average UK adult gives around £30,000 in total to charity during their lifetime and this number is only increasing with the rise of social enterprises. The split of giving typically looks like this: 60% giving by direct debit, 20% to collection boxes and 20% by sponsoring friends, family and colleagues.
This blog looks at how you can donate to charity in a tax efficient way.
Using the Gift Aid Scheme
The most tax efficient way to give to charity is most definitely via the Gift Aid Scheme. When you donate, the charity can reclaim the basic rate of tax or 20% you have already paid on your donation. By way of an example, a £10 donation is worth £12.50 to your chosen charity.
And it is not only basic rate tax payers who can take advantage of this tax efficient benefit. If you’re a higher rate taxpayer for example, you can claim the difference between basic rate and higher rate tax on your donation.
Did you know? If you donate goods to a charity shop the charity shop can claim Gift Aid on the sales of your donations. We would suggest to let your chosen charity shop know you are a UK taxpayer so they can claim Gift Aid.
Giving through your salary
This is by far the most simple and most consistent way to give to charity – payroll giving. This is a great way to give to your chosen charities on a regular basis and provide much needed regular income whenever you are paid a salary by your employer. It is also an easy way for you to give to charity in a tax efficient way.
You can give to any organisation recognised as charitable by HMRC, a full list can be found here.
Leave money in your will
As you may already be aware, on death your spouse will inherit your estate without incurring a tax bill up to the value of of the Inheritance Tax (IHT) threshold, currently at £325,000. Anything you leave beyond this threshold is taxed at 40% unless you leave it to an exempt body such as a UK charity.
As you give to charity tax free from your salary or via gift aid, the same is also true with your estate after you die. Charitable gifts left to your chosen charity are paid out before your estate’s value is assessed for inheritance tax purposes. Therefore, you are able to both gift to your favourite charity on death whilst also reducing your inheritance bill for your loved ones. Win win.
You can give to your chosen charity after you die in several ways:
- Leave a cash amount explicitly noted in your will to your charity of choice
- You can leave a specific item to charity, such as property or shares
- You can also leave your entire, or just a share of your estate, to charity once gifts, taxes, debts and costs have been paid.
Small businesses – Sole-Traders and Partnerships
If you are small business owner and looking to gift regularly from the profits of your small business, unfortunately charitable donations are not tax-deductible expenses in the accounts. However, you can give money to a charity and receive benefits in return, such as promotions or advertising, which is a tax deductible expense.
Advertising examples include 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.
Small businesses – limited companies
If you are limited company director, the good news is that donations to charities are tax deductible in a company’s accounts. However, charities are unable to 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 it would most likely be financially advantageous for your company to make charitable donations rather than you personally. An example of the difference between the limited company and the director making a £10 donation is illustrated below:
|If Donated By |
|If Donated By |
|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 you can see above, the charity gains more from a company donation versus a company director donation.
If you are a higher rate tax payer, the rules change, as noted below.
Higher rate tax payers
If you are a higher rate taxpayer, your basic rate tax band is increased bt the amount of your charitable donation, and therefore it is important that you let your accountant know or HMRC when it comes to completing your end of your tax return so you and your chosen charity do not miss out.
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Written by Shaima Todd.