Donating tax-efficiently this Christmas
This year has seen demand for charitable services rise higher than ever
However, donations have also fallen as the pandemic has hit personal finances.
Figures from The Big Give1 suggest that nearly two thirds of charities expect lower-than-usual donations this year, but that over half have seen demand for their services rise since the pandemic hit.
With this in mind, making a charitable donation this Christmas is a great way to put money where it is needed. You can make it count even more if you give tax-efficiently, so it pays to make sure you understand the rules around charitable giving before you donate.
One of the most valuable tax breaks when giving to charity is Gift Aid. This allows charities to claim back the basic rate tax you have paid on a donation, while you can claim back any higher rate or additional rate tax yourself through your tax form.
This can make a significant difference to the amount a donation is worth. For example, if you gave £100 to charity from your bank account, the charity could push that gift to £125 by reclaiming the tax, while you’d then be able to reclaim a further £25 through your tax form if you were a higher rate taxpayer, or £31.25 if you are an additional rate taxpayer.
There is more about the Gift Aid scheme on the Government’s website here, https://www.gov.uk/donating-to-charity/gift-aid. Gift Aid is a relatively simple scheme, but in order for a charity to benefit, you must have filled in a Gift Aid declaration for each organisation, confirming that you have paid at least as much tax as the amount being reclaimed (either income or capital gains tax will count).
When you fill in your tax form, don’t forget to include details of the charitable donations you have made to ensure you receive extra tax relief due to you.
If your employer operates payroll giving, you can donate directly through this scheme, meaning that the charity receives the money straight from your pay before tax is paid on it but after National insurance, which means you then don’t have to claim back any of the Gift Aid through your tax return. These schemes allow you to give to as many charities as you like, and you can cancel at any time.
There’s more detail on the Government website here about how employers can set up these schemes, at https://www.gov.uk/payroll-giving.
Tax relief on asset disposals
If you give away or sell assets to benefit a charity, this can be very tax efficient as well, particularly if you are liable for Capital Gains Tax. All gifts to charity qualify for relief on Capital Gains Tax, and you can also claim income tax relief on what are known as ‘qualifying investments’, which includes listed shares, land and investment fund and trust holdings.
For more information on how this works, you can see https://www.gov.uk/donating-to-charity/donating-land-property-or-shares
Charitable giving can also reduce an inheritance tax (IHT) bill, so if you’re planning to leave a charitable legacy it is a good idea to take tax into account.
If you leave something to charity in your will, this gift won't count towards the total of your estate for IHT purposes, while you can also cut the IHT rate on the rest of your estate from 40 per cent to 36 per cent, if you leave at least 10 per cent of its value to charity.
However you choose to give to charity, making sure you understand the tax implications can increase the impact of your gift. It can be worth consulting a financial adviser, who will be able to help you to work out the most tax efficient way for you to structure your own charitable giving, since everyone’s circumstances are different.