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What are the tax benefits of donating to a charity?

By donating to a charity or cause of your choosing, not only are you making an important donation to something you care about, you can minimise your income tax too.

There are multiple ways to save tax by giving money to charity – here's how to go about it. 

What are the tax benefits of donating to a charity?

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Can you reduce your income tax through charitable donations? 

While taxes are designed to raise money for the government, there are ways for people to reduce the amount of money they pay in taxes through certain behaviours and actions.

Recognising the value of donating to charities and organisations that need financial support, the UK government incentivises charitable donations by offering a level of tax relief for people who donate to charities.

There are a few different ways to reduce your income taxes by donating to charities, which can be good for both your finances and the charity you are donating to.    

What is Gift Aid?  

Gift Aid is a way for certain taxpayers to reduce their income taxes by donating to a charity or organisation.

There are a few different ways of donating to a charity, and subsequently calculating the taxes that you may need to pay.

But whether you are making a charitable donation today or leaving a donation in your will, Gift Aid is one way of maximising the impact of your money.  

How does Gift Aid work? 

Gift Aid allows higher and additional rate taxpayers to claim tax relief on their charitable contributions.

Under current tax regulations, the current income tax thresholds mean that higher and additional rate taxpayers pay 40 and 45 per cent tax on their income.

Through Gift Aid, however, a charity is able to reclaim the basic rate of tax of 20 per cent on a donation, with the other 20 or 25 per cent available to be reclaimed by the person donating, thereby reducing their income tax bill.  

So if you are a higher taxpayer and donate £100 to a charity, the charity can claim gift aid to claim an extra 25p for each pound you donate.

This will bring the total donation to £125 at no extra cost to you. You can then claim back another 20 per cent, reducing your income tax by £25.  

Charities need to be registered with HMRC to be able to claim Gift Aid relief, and you also need to make a Gift Aid declaration form.  

Reducing inheritance tax through charitable donations 

Inheritance Tax (IHT) is a tax on a recently deceased person’s estate if it is valued over £325,000.

Effective IHT planning can help reduce the level of tax you pay, and charitable donations are one such way.  

While leaving a certain amount of money to your descendants can see a proportion of this money subject to tax, any money you donate to a charity is not.

Plus, when you donate 10 per cent of your estate to charity, the IHT on your taxable estate drops from 40 per cent to 36 per cent, meaning that leaving a portion of your estate to charity can be better for your descendants too. 

Payroll donation schemes 

You can also claim some tax relief through payroll contributions. Your employer can allow you to make automatic donations to charity from your monthly pay or pension contributions.

These donations are not subject to income tax but you still pay national insurance contributions.  

The exact amount of relief you receive depends on your marginal income tax rate.

By donating £1, basic tax rate payers receive 80p back and higher rate payers receive 60p, while additional rate payers receive 55p.  

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Can limited companies get tax relief from charitable donations? 

In the same way that individuals can claim certain tax relief by donating to charity, limited companies can also pay reduced corporation tax by donating to charity.

Eligible donations include financial donations, equipment or items sold by the company – land, property and shares – and sponsorship payments or employees working charitable days or on secondment to a charity.

Businesses can then deduct the value of the donation from the business’s profits before corporation tax is paid.  

Can you get tax relief on land, property and shares? 

Land, property and HMRC-approved shares can be donated to charities without being subject to tax. Moreover, you can claim income and capital gains tax relief through these donations.  

How do you claim tax relief? 

Unless you are donating to charity through a workplace scheme, you can claim your tax relief by filling out a Self-Assessment Tax Return, where you can declare your charitable income and reclaim any tax relief you are owed.  

Want to learn more?

Donating to charity isn’t just good for the organisations you are donating for.

It can work for you financially, too. Speak to a financial adviser today and find out how donating to charity can help you reach your financial goals.

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About the author
Kate has written for leading publications and blue chip companies over the last 20 years.