On 5 September, the UN’s International Day of Charity encourages people to get involved with philanthropic activities. It’s the perfect time to think about donating to good causes.
Considering how to give tax-efficiently could benefit charities and you. Here are five ways you can make the most of tax allowances.
1. Boost your donations with Gift Aid
If you’re a UK taxpayer, you can make your donations go further by using Gift Aid.
Gift Aid allows registered charities to claim back some of the Income Tax you’ve paid.
For every £1 you give, charities can claim an extra 25p. So, donate £100, and your chosen charity will benefit from £125 in total. It provides a valuable boost to good causes.
In most cases, using Gift Aid is simple. You will need to make a Gift Aid declaration so the charity can claim it. Often, all you need to do is fill in a form or tick an online box.
Despite this, according to the Charities Aid Foundation, a quarter of eligible donors don’t use Gift Aid for charitable donations. It’s estimated that more than £500 million of Gift Aid goes unclaimed every year.
2. Claim tax relief on your donations
While Gift Aid allows charities to claim back the basic-rate of Income Tax paid on the donation, tax relief can also make giving more efficient for you if you’re a higher- or additional-rate taxpayer.
You can claim back the difference between the tax you’ve paid on the donation and the amount the charity claims.
Let’s say you’re a taxpayer that pays the 40% Income Tax rate and you want to donate £10,000 to a charity.
The charity can claim a portion of the Income Tax paid through Gift Aid, and you can claim the remainder (£2,500) through tax relief. So, the charity benefits from a £12,500 donation and, once you have reclaimed the tax relief, the donation has only cost you £7,500.
You can claim the tax relief by completing a self-assessment tax return.
3. Give directly from your salary
Giving to charitable causes directly from your salary is a good option if you want to make regular donations.
If your employer has a payroll giving scheme, it means you can donate to a good cause before tax is deducted. Again, this means you benefit from tax relief.
So, if you’d like a charity to benefit from £150 each month, the cost to you would be:
- £120 if you’re a basic-rate taxpayer
- £90 if you’re a higher-rate taxpayer
- £82.50 if you’re an additional-rate taxpayer.
You can also use this option to reduce your tax liability. For example, making a donation could keep your total income below Income Tax thresholds.
4. Gift shares or other assets to a charity
It’s not just monetary donations that charities can benefit from. You can also gift assets, such as shares or property.
Again, you can deduct the value of your donation from your Income Tax bill through a self-assessment tax form.
Capital Gains Tax, which is usually paid on the profit you make when selling certain assets, also doesn’t apply if you give the assets to charity.
In some cases, a charity may ask you to sell the assets on their behalf. You can still claim tax relief on these donations but you should keep a record of the charity’s request.
5. Leave a charitable legacy in your will
You can choose to leave some or all of your estate to good causes in your will. As well as supporting charities, it can be tax-efficient if your estate could be liable for Inheritance Tax (IHT).
If the total value of all your assets exceeds £325,000, your estate could be liable for IHT. A charitable legacy could help you reduce a potential IHT bill in two ways.
First, IHT is not due on charitable gifts. As a result, you can use charitable gifts to bring the value of your estate below IHT thresholds.
Second, if you gift at least 10% of your entire estate to charity the IHT rate will fall from 40% to 36%. Depending on the size of your estate, this reduction could mean you leave more for your loved ones while supporting a good cause.
If IHT is a concern, there are often steps you can take to reduce the cost. Please contact us to discuss your options.
Do you want to make charitable donations part of your financial plan?
Whether you want to make a one-off donation, provide regular gifts, or leave a charitable legacy, you can make gifting part of your financial plan. It’s a step that can ensure you make the most of tax allowances and that you achieve your charitable goals.
Please contact us to discuss how charitable donations could fit into your plans.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate or tax planning.