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Tax Efficient Giving: Charitable Donations and UK Tax Relief

Introduction: The Importance of Charitable Giving

People working for a charity
Tax Efficient Charity Giving: Jack Ross Explains

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Charitable giving is a social good and offers a range of tax benefits. By understanding how to give to charity tax-efficiently, you can maximise the impact of your donations. This guide explains the intricacies of tax-efficient giving in the UK, including Gift Aid, tax relief, and other considerations.

What is Tax-Efficient Giving?

Tax-efficient giving refers to the methods and practices that allow you to donate to charity while reducing your tax bill. It involves utilising UK tax laws to ensure the donor and the charity receive maximum benefits.

Gift Aid: Maximising Your Charitable Donations

One of the most effective ways to give to charity tax-efficiently is through Gift Aid. This scheme allows charities to claim an extra 25p for every £1 you donate at no additional cost to you.

How Does Gift Aid Work?

  • Basic Rate Taxpayer: If you are a UK taxpayer and have paid enough tax to cover the Gift Aid on your donations, the charity can claim Gift Aid.
  • Higher Rate Taxpayer: If you pay a higher rate, you can claim additional tax relief on your Self Assessment tax return.

Eligibility for Gift Aid

For your donations to be eligible for Gift Aid, you must:

  • Be a UK taxpayer.
  • Have paid at least as much in Income Tax or Capital Gains Tax in that tax year as the amount to be claimed by the charity.
  • Make a Gift Aid declaration that gives the charity permission to claim it.

Claiming Tax Relief on Your Donations

In addition to Gift Aid, you can claim tax relief on the donations you make:

  • Income Tax Relief: You can claim back the difference between the rate you pay and the basic rate on your donation.
  • Capital Gains Tax: Donating assets or shares to charity can also offer relief from Capital Gains Tax.

How to Claim Tax Relief

  • Self Assessment Tax Return: You can claim tax relief for donations to charity on your tax return.
  • Payroll Giving: Also known as Give As You Earn, you can donate directly from your salary before tax is deducted.

Tax Year Considerations

It is essential to keep track of your donations throughout the tax year. You can carry back your Gift Aid donations to the previous tax year if you have paid enough tax to cover both the current and previous tax years’ donations.

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Advanced Charitable Giving: More Than Just Money

While monetary donations are the most straightforward way to give to charity, other forms of charitable giving can be equally tax-efficient.

Donating Assets and Shares

Donating assets or shares to a registered charity can reduce your Capital Gains Tax and allow you to claim Income Tax relief. You will not have to pay Capital Gains Tax on assets you give away, and you and the charity can claim tax relief.

Charitable Trusts: A Long-Term Commitment

Setting up a charitable trust can be a tax-efficient way of making a long-term commitment. These trusts are exempt from Inheritance Tax, and their donations can be written off against your tax liability.

Community Amateur Sports Clubs (CASCs)

Gift Aid extends beyond just registered charities. If you are a supporter of local sports, donations to Community Amateur Sports Clubs (CASCs) are also eligible for Gift Aid.

Eligibility and Claiming Gift Aid

Like charities, you must make a Gift Aid declaration for your chosen CASC. The club can then claim Gift Aid at the basic rate, and if you are a higher-rate taxpayer, you can claim additional relief through your Self Assessment tax return.

Corporate Giving: Companies Can Donate Too

If you own a business, you can also engage in tax-efficient giving. Charity donations can be deducted from the company’s profits before calculating Corporation Tax.

Calculating Corporation Tax

The donation amount will be deducted from the total profits, ultimately reducing the corporation tax due. The company needs to keep records of these donations as they may need to be reported to HMRC.

Future Donations: Planning Ahead

To maximise the tax relief on future donations, ensure you have completed a Gift Aid declaration covering donations for this tax year and the next. You can also carry back Gift Aid donations to the previous tax year if you have paid enough tax to cover these donations.

Summary: Every Little Helps

By understanding the multiple avenues for tax-efficient giving, you can reduce your tax burden and provide meaningful support to charities and CASCs.

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To make a tax-efficient gift to charity, you can donate £100, and the eligible charity can claim an extra 25% from HMRC in Gift Aid. This means that the charity receives £125 for every £100 donated.

The rate of tax relief on charitable gifts depends on your circumstances, including your total income and any other donations made to charities. If you are a basic-rate taxpayer, then you can benefit from tax relief at the basic rate of 20%. Higher-rate taxpayers may be eligible for additional relief at their higher rate of 40% or 45%.

Yes, there are several options available. For example, if you donate through pension schemes or direct giving schemes such as payroll giving, then this could enable you to reduce your income tax bill. Alternatively, donating £3,000 in one year may also be eligible for exemption from inheritance tax.

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