Do your bit for charity – and your pocket!

Published by Nigel Moon on 7 October 2021

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Helping the poor and vulnerable, providing education and fresh water, saving lives and the planet, looking after animals – there will be a charity out there involved in something close to each of our hearts. Wouldn’t it be good if we could help our favourite charities with the money they so desperately need – and save some cash ourselves so that gifting is more affordable?

Well, we can! Thanks to successive governments recognising the need to support charitable organisations and encouraging us to do so with various tax breaks.

Here, we look at some of the tax incentives available to individuals donating to UK registered charities.

Gift aid

This is the most common, cropping up as appeals, certain memberships and entrance fees – and even in charity shops that are a common sight in our high streets. Too often we forget about gift aid – but it can really make a big difference and is simple to sign up to.

If I were to give a charity £100 and do nothing more, how much would the charity get? £100 at a cost of £100 to me.

But what if I were to make a gift aid declaration? Well, now the charity gets £125. The cost to me is still only £100 if I am a basic rate (20%) taxpayer – or £75 if a (40%) taxpayer.

The way this works is that under gift aid my donation is treated as a gross amount being gifted less 20% tax relief to be deducted at source – in other words, £125 less £25 tax relief. Since the charity doesn’t pay tax, it can recover from the taxman the £25 tax deducted from so it gets £100 from me and £25 as a tax refund – £125 in total.

If I were a higher rate taxpayer, things don’t stop there. I am entitled to 40% tax relief not just 20% and I can recover the rest (another £25) by submitting a tax return or getting my PAYE tax code amended. Now, the donation has only cost me £75 and the charity has received £125.

The tax relief is even more for additional rate (45%) taxpayers those whose income, generally speaking, falls in the range of £100,000 – £125,140 (2021/22 tax year figures). In the latter case, the personal allowance is being reduced by £2 for every £1 income that exceeds £100,000 meaning that the effective rate of income tax in this band is 60%! Gift aid payments reduce income for this purpose and so can rescue some or all of the personal allowance.

It is only money payments that can get this treatment – but there is a scheme where donations of goods to a charity shop can also be cost effective in this way. When you take donations to the shop, they record what you have gifted and how much the items are sold for. As part of the arrangement, you allow the charity to keep the cash received for the sale – and that is the cash value of your donation. It’s surprising how these modest amounts add up, so why not sign up for gift aid if your local charity shop offers it?

A gift aid declaration can be made for a one-off donation or be effective until you withdraw it. But what is it?

It is a declaration that you are a UK taxpayer paying income tax and/or capital gains tax for the tax year in which the donation is made (or treated as made) at least equal to basic rate tax relief on the donation. If it happens that you don’t pay enough tax on your income or gains, then you have to pay the shortfall over to HMRC.

Taking the above example of a donation of £100 you need to have a tax bill of at least £25 to be able to use gift aid – you can work out how much tax you need to be paying by dividing your cash donation by four.

Gift aid does not work for non-taxpayers – if your spouse pays tax, it is worth getting them to make the donation instead of you. Also, if you are a basic rate taxpayer and your spouse pays higher rates of tax, again it is worth having them make the donation under gift aid.

There is another tweak that can be beneficial – which is that, in certain situations, a taxpayer can make a gift aid donation in one tax year and carry it back to be treated as paid in the previous tax year. To be able to do this, the donation must be made before the tax return for the earlier tax year is signed (and before the 31 January deadline for that return) and the appropriate claim made in that return.

This option can be particularly useful where income fluctuates from year to year and thus marginal tax rates vary – or where it is discovered in hindsight that the personal allowance has been reduced but potentially might be rescued.

Gift of land or shares

This is not for everyone, of course – but it can be very valuable to those who have land or quoted shares and would like to make sizeable donations to a charity but are worried about the capital gains tax cost in particular.

Normally, a gift is treated as though a sale at market value and the consequent gain is charged to capital gains tax so a tax charge can arise without cash to pay it. Selling the shares to get cash will involve transaction costs and a capital gains tax bill.

The good news is that when land or quoted shares are gifted to a charity, this rule doesn’t apply and the gain isn’t taxable – so no capital gains tax is due.

Better still, the value of the gift can be deducted from income as a charitable donation and income tax is therefore saved – so potentially capital gains tax and income tax relief!

Since the charity doesn’t pay tax, it can sell the land or shares tax free – so again the charity can receive a sizeable amount at a reduced cost to the donor.

Although land is included in the relief, it is usually shares that are gifted, typically where the taxpayer’s funds are tied up in an investment portfolio.

Legacies in Wills

Amounts left to charities under your Will are exempt from Inheritance Tax (IHT) thus potentially saving 40% tax.

If you would like to leave a significant charitable legacy, the rate of 40% IHT applying to the rest of the estate can be reduced to 36% if, in broad terms, 10% of the chargeable estate is left to charity. The actual calculation of the 10% and what it applies to is rather tortuous, but your solicitor will be able to draft an appropriate clause in your Will to achieve the desired result.

Lifetime gifts are also exempt from IHT – but they do not count towards the 10% amount mentioned above.

Don’t lose out on tax relief

Tax reliefs are there to encourage charitable giving – so why not take advantage of them, perhaps by using them as an incentive to donate in the first place or as an opportunity to give more than you would have done without the tax relief.

But, if you are a higher or additional rate taxpayer, you will only get the extra relief due to you if you tell the taxman – so make sure you record the gift aid payments you make and include them in your tax return or ask HMRC to include them in your PAYE tax code if you don’t file tax returns. It is surprising how many people are missing out on extra tax relief – don’t be one of them.

Make this a Win-Win for you and the charity!

To learn more about the topic explored in this article, contact us here.

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