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Charity donations and how they can affect your tax liability

By admin
20 Oct 2023
IHT & Estate Planning

If when counting your pennies and pounds you get the sudden urge to be philanthropic, it is important to understand how this generosity can affect your personal tax position.

Whilst charity donations by an individual (including sole traders and partnerships) to a charity or to community amateur sports clubs are considered to be exempt from Inheritance Tax, a general overview of inheritance tax can be found here, there are many different ways in which an individual may wish to make a charity donation. The aim of this article is to briefly explain some of the ways in which your donations can have an implication on your tax position.

The tax on your charity donation will benefit either you or the charity depending on how/what you donate:

  • Direct donation of cash, claiming Gift Aid
  • Straight from your wages or pension through a Payroll Giving scheme
  • Land, property or shares
  • In your will

Donating through Gift Aid means the charity can claim the basic rate of tax you’ve paid on the donation back from the Government (i.e. 25p for every £1.00).  If you’re a higher or additional rate taxpayer, the claim also increases the relevant tax band by the gross donation resulting in more of your income is taxed at a lower rate.  However, if your total income is below the personal allowance or you otherwise have no tax liability and you make a claim for Gift Aid, HMRC will collect the tax element of the gross donation from you.

Your charity donation will qualify as long as it is not more than four times what you paid in tax that tax year. If the charity gets back more tax than you’ve paid. HMRC may ask you to pay more tax to cover the difference, this is why you must tell the charity if you stop paying enough tax.  In order for a claim to qualify, it has to be made in respect of a genuine donation – you cannot receive anything in return (such as tickets, memberships, goods or services).

If your employer or pension provider offers a Payroll Giving scheme, any charity donations you give through the scheme will be taken before Income Tax is calculated. You’ll still pay National Insurance contributions on the amount of your donation but the amount of relief you can claim on this is dependant on your income tax rate. 

You do not have to pay Inheritance Tax on land, property or shares that you donate to charity upon your death, in addition, you may also be eligible to tax reliefs on both Income Tax and Capital Gains Tax. For Income Tax, you deduct the value of your charity donation from your total taxable income in the year you made the gift to charity, this reduces the amount subject to income tax and in-turn reduces your liability.

You do not have to pay Capital Gains Tax on land, property or shares you give to charity. However, you may have a liability should you sell them for more than they cost you but less than their market value. This gain is calculated using the amount the charity actually pays you rather than the value of the asset.

When your time does unfortunately come, you can leave a charity donation in your will. This can be a donation of a specific legacy (cash or asset), or what’s left after other gifts have been given out (residual estate). Your chairty donation will either be taken off the value of your estate before inheritance tax is calculated or, if 10% or more of your estate is left to charity, reduce the rate at which inheritance tax is charged from 40% to 36%. Should you want to plan ahead for your estates inheritance tax position, you can view our overview of inheritance taxes and get in contact here. 

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.  If you’re not registered for self-assessment and you’re a higher rate taxpayer, HMRC will adjust your tax code to provide relief.

A charity donation involving Edge Tax!

Whilst there are a multitude of excellent charities out there that require support in order to keep up their good work, we would like to draw your attention to our charity of the year, Brain Tumour Research. This is an organisation that strives to find a cure for brain tumours, improve patient outcomes, and enhance the quality of life for those affected by this devastating disease. By contributing to this cause, we can make a significant difference in the lives of brain tumour patients and their families.

Our very own Director, Anton, is going to be taking on the challenge of running the London Marathon in April 2024 to help raise funds for the cause. You can read all about this the charity and Anton’s motivations here. or simply make a donation here

If you would like to discuss your charitable deductions and how this may affect your UK tax liability, or if you are worried you may have made a mistake in the past, please do not hesitate to contact us.

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