Do you make donations to charity? Are you wondering how much of your charitable giving is tax deductible? Here is everything you need to know about the impact of charitable donations on your tax bill.
[top_pitch]
What amount of charitable giving is tax deductible?
The tax implications of your donation will differ depending on a couple of factors that include:
- Whether you are an individual or a limited company
- The timing and form of your donations, as well as the amount of your income and capital gains
Individual
Donations to charity from individuals are usually tax free. Who receives the tax depends on the nature of the donation and how it is made.
Gift Aid
The Gift Aid scheme simply means that if you donate to a charity or a community amateur sports club (CASCS), the organisation can claim back the tax you paid on the donation.
When you make a donation via Gift Aid, it is assumed that you have already paid basic rate income tax on it. As a result, the value of the donation is ‘grossed up’ by the amount of tax you are assumed to have paid on it.
For example, if you donate £100 to a charity as a basic rate taxpayer, it is assumed that you have already paid 20% income tax on the donation. So it’s as if you gave £125 but 20% was deducted as tax.
The charity can claim this 20% basic rate tax (which is about 25% of the value of your actual donation). By claiming the tax, the charity will now receive a total of £125.
If you are a higher or additional rate taxpayer, paying income tax at 40% and 45% respectively, you can reclaim the difference between the rate you normally pay and the basic rate on your donation.
So, after the charity has reclaimed the 20% basic rate, you, as a higher rate taxpayer, can reclaim the remaining 20% of the gross donation (or 25% of the actual donation).
If you are an additional rate taxpayer, then you can personally reclaim the remaining 25% of the value of the gross donation (or 31.25% of the actual donation).
You can claim this relief on your self-assessment tax return, or by asking the HMRC to amend your tax code.
For the charity to claim the tax, you need to make a Gift Aid declaration. You can do this by filling in a form that you can request from the charity.
[middle_pitch]
Payroll Giving schemes
Some employers give the option of donating to charities directly from your wages or pension.
This is known as the Payroll Giving scheme. Here, any donations you give are calculated after your National Insurance contribution but before income tax is deducted.
The tax relief that you will get will be dependent on your tax rate band. To donate £1, it will only cost you:
- 80p if you are a basic rate taxpayer
- 60p if you are a higher rate taxpayer
- 55p if you are an additional rate taxpayer
As an example, if you donate £10 a month to your favourite charity as a basic rate taxpayer, it will only cost you £8 as you save £2 on income tax.
These rates are different in Scotland. More information on Payroll Giving is available on the gov.uk website.
Donating to charity through land, property or shares
You won’t have to pay tax on land, property or shares that you donate to charity. This includes selling them for less than their market value.
You will get tax relief on both income tax and capital gains tax.
You can pay less income tax by deducting the value of your donation from your total taxable income.
Also, you won’t have to pay capital gains tax on land, property or shares that you give to charity. However, if you sell them to a charity for more than they cost you but less than their market value, then you may have to pay the tax.
Donating to charity in your will
If you decide to donate to a charity in your will, then your donation will either:
- Be taken off the value of your estate before inheritance tax is calculated, or
- Reduce your inheritance tax rate if 10% or more of your estate is left to charity.
Companies
Several forms of tax relief are available for limited companies that donate to charity. Usually, these companies will pay less corporation tax if they donate:
- Money
- Equipment or trading stock
- Seconded employees
- Land, property or shares
- Sponsorship payments
To claim corporation tax relief on money, land, property, or shares, simply deduct the donation’s value from your pre-tax business profits.
If you have seconded employees or sponsored a charity, then you can deduct costs as normal business expenses in your company’s annual accounts.
For equipment you donate, you can claim capital allowances on your company’s annual accounts.