Lovin’ this article, but need more advice on your tax affairs?
Get in touch today.
It is reported there has been a “steady decline” in the total amount of charitable donations. This is despite the availability of healthy charity tax relief.
This article will focus on precisely what reliefs are available in the UK for the philanthropically minded taxpayer.
The nature of the donation – whether one is gifting cash or assets – will dictate the position for both the person making the donation (the donor) and the charity itself.
We consider three potential types of donor:
This note will concentrate on cash gifts rather than the donation of assets.
This is by far the most common type of charitable donation in the UK is cash.
It is possible for the taxpayer to obtain gift aid on the donation, meaning the charity can effectively claim an additional 25% bonus on the donation. This is as long as the donor has paid enough income tax and / or capital gains tax to ‘frank’ the gift.
Where an individual has made this ‘Gift Aid declaration’ (see Appendix one for the requirements for Gift Aid) then this has consequences for their annual tax computation.
The basic and higher rate tax bands are extended by the grossed up charitable donation. The effect of this is that this part of their income taxed at the lower rates is increased.
So, for example, a higher rate taxpayer who makes a gift of £10k – which is worth £12.5k when grossed up – is likely to save at least £2.5k in tax.
Similarly, if this person is paying tax in the 45% band, the higher rate threshold will also be extended by £12.5k. This means that there would be a further 5% benefit of £625.
There are circumstances where this benefit might be increased.
Circumstances where relief may be increased
This level of tax relief may be further increased if the individual, before taking in to account the charity relief:
In addition, for pension purposes, where adjusted net income exceeds £150,000, then the Annual Allowance is tapered away from £40,000 to a minimum of £10,000. However, a charitable gift can increase the amount an individual can contribute into their pension during a tax year.
A cash donation to a charity by a Company will reduce your corporation tax.
Essentially the amount you donated is deducted from your business profit pre-tax, therefore reducing the amount of tax your company pays.
There are various types of contributions that your company can make. Some of these are:
It is also possible that a charity can be funded by sponsorship.
However, for the purposes of this note, we have concentrated on cash donations.
There are some restrictions on payments made. The payment won’t qualify if:
The deduction is simply claimed on the corporation tax return for the period in which the funds were donated.
The relief will be worth 19%, which is the prevailing rate of corporation tax.
It is also possible for an individual to personally lend an amount to the Company. The Company then uses these funds to the charity and claim the relief.
Once the company has made a profit (and after corporation tax has been paid) the Company then repays the individual. The refund of the loan is free of any further tax.
However, whether this makes sense, bearing in mind they will miss out on personal charity reliefs, will depend on the circumstances.
If you have any queries about tax relief on charitable gifts, or tax in general, then please do get in touch.
APPENDIX ONE – GIFT AID CONDITIONS
Perhaps, unsurprisingly, the Gift Aid declaration comes with a number of conditions that need to be satisfied.
These are as follows:
[su_posts template=”templates/teaser-loop.php” posts_per_page=”5″ tax_term=”1307″ order=”desc”]
Tax relief on charitable gifts added 6 February 2020