Donating to charity tax effectively

There are various ways of donating to charity tax effectively. The method of your donation depends on whether you are donating via your business or as an individual. 

Donating to charity tax effectively

One of the most popular methods of donating to charity tax effectively if you are an individual is via Gift Aid. 

So what is Gift Aid?

Gift Aid is an income tax relief which is aimed at benefiting charities and Community Amateur Sports Clubs. Under this scheme the charity or sports club claims a tax refund from donations made by individual taxpayers.

The key points to mention are as follows:

  • The individual must pay sufficient income or capital gains tax to cover their grossed up donation. If not, then they will be required to repay HM Revenue for the tax refunded to the charity/sports club. 
  • Gift Aid does not apply to donations made by companies (see below)

Full details of the relief and the rules that apply are set out here.

So how does the relief work?

A Gift Aid donation received by a charity/sports club is treated as made net of basic rate tax. This means the charity is able to recover the basic rate tax credit. 

If you're a basic rate taxpayer you'll receive no further tax relief when you make a donation. If you're a higher or additional rate taxpayer you can claim tax relief on the difference between the higher/additional rate tax and your gross donation.

Some examples

Peter makes a charitable donation of £100. The charity reclaims an additional £25 from HM Revenue (£100 x 20/80)

Steve is a 40% taxpayer and donates £100. The sum of £25 (40%-20% x £125) can be reclaimed by him. His net donation costs £75.

Tony is a 45% taxpayer and also makes a donation of £100. The sum of £31.25 (45%-20% x £125) can be reclaimed. His net donation costs £68.50.

Is it only monetary donations that qualify as Gift Aid donations?

Provided certain conditions are met, payments for subscriptions, memberships and sponsorship can also be Gift Aided.

Gift Aid - other points

The amount of Gift Aid is restricted where you receive a valuable benefit as a result of making a donation. The limits are set out here. Tax relief can also be denied if a donation is made with the intention of receiving a tax advantage directly or indirectly from the charity for either the donor or a person connected with them. 

It's possible to 'carry back' a Gift Aid donation and treat as paid in a previous tax year. You might consider this if for example you were a higher rate taxpayer in the previous, though not the current tax year. Or you may wish to claim the tax relief sooner rather than later.

What if I prefer to use my company to make a charitable donation?

Put simply, the amount your company donates to a charity is deducted from your company's profits reducing it's tax bill.

Your company's donation can be made in various forms:

  • Money - Payment won't qualify if it's a loan that will be repaid by the charity or there are conditions attached. For example the charity must buy property from your company in return for any monetary donation Any donations are also subject to the benefit limits referred to above. Additionally any payment won't qualify if it is a distribution of company profits, for example a dividend.
  • Equipment - Your company can also donate used equipment to a charity. This could cover a number of items such as office equipment and furniture, tools, or vans. Not only can your company claim tax relief on equipment donations  you'll be improving your green credentials too.
  • Trading Stock - You can deduct the full cost of the items from your company's profits before you pay tax. However, if your company is VAT registered you'll need to account for VAT on any transactions correctly.
  • Land, property, shares (though not in your own company)  - If your company gives land, property or company shares, your company can deduct the market value of the gift from it's profits. You'll need to establish the market value of the gift to calculate the tax relief. It would therefore be prudent to use a professional to provide an impartial valuation.
  • Employee time (when seconded) - If your company temporarily transfers an employee or an employee volunteers for a charity in work time, you can deduct those costs as per normal. You can continue to pay the employee (which could be yourself) . You can also deduct the costs (including wages and business expenses) from your taxable profits as if you would do normally.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at richard@tfaaccountants.co.uk.

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