Understanding the tax benefits of giving to others
We explain how to make your donations go further
Around Christmas many people choose to give to charity, set up regular donations for the year ahead or review the donations they’re already making. But how do you decide which cause to support and understand how your money is going to be spent?
How do I know it’s a genuine charity?
Check for the charity registration number, against the database on www.gov.uk/findcharityinformation
If someone comes to your door collecting for charity, check they are wearing an ID badge and that their collection tin is sealed. The Charity Commission also recommends asking questions about the cause, as any fundraiser should know this information.
If donating online, find the charity’s website through a search engine, rather than following links, as they may take you to fake websites.
How do I know where the money goes?
In recent weeks concerns have been raised about people not understanding where charitable donations go.
A number of charities offer the ability to ‘donate a goat’ or ‘donate water for a family of four’, and some donors assumed their money would be used for that direct purpose. Instead, the money goes into the charity’s central pot.
The Charity Commission also lists the finances of each charity with annual income of more than £500,000, so you can see how much income they have, what they spend it on, where it operates and how many people they employ.
INCOME TAX SAVED
If you donate money and use Gift Aid, the charity will get a boost to any money you donate by claiming back the tax due. It means that for every £1 you donate, the charity can claim back 25p. You’ll need to fill in a form with the charity and be a UK taxpayer, and they do the rest of the work.
If you’re a higher-rate taxpayer you can also claim back money through your tax return. You will get 20% tax relief on the full donation. So if you donate £100, and the charity gets £25 back through tax relief, then a higherrate taxpayer can get back 20% of the £125, which equals £25.
This effectively works by increasing your basic-rate tax band by the amount you donate. So if you donate £1,000, you basic-rate tax threshold will increase from £46,350 to £47,350, in the current tax year.
WHAT IS PAYROLL GIVING?
Some employers offer the ability to donate to charity through the payroll. This saves you the hassle of claiming the tax back, as the payment is made before income tax is deducted from your earnings.
This means that for every £100 donated, a basic-rate taxpayer only pays £80, a higher-rate taxpayer pays £60 and an additional-rate taxpayer will pay £55.
Unlike other salary sacrifice deductions, you will still pay National Insurance. To take part your employer will need to run a Payroll Giving scheme.
GIFTING ASSETS AND THE TAX BREAKS ON OFFER
If you give certain assets, property or land away to charity you don’t have to pay any capital gains tax on it and you can claim income tax benefits.
You can donate assets such as listed shares, investment funds and property. You’ll be able to claim income tax relief on the market value of those assets.
What’s more, you will not have to pay tax on any gains you’ve made on an asset if you gift it to charity. Ordinarily, you pay capital gains tax on any gains each year above the annual allowance (currently £11,700), at a rate of 10% for basic-rate taxpayers or 20% for higher-rate taxpayers.
INHERITANCE TAX BENEFITS
If you leave at least 10% of your estate to charity in your will the rate of inheritance tax you pay on the rest of your estate is reduced.
That gift to charity from your estate is free of inheritance tax, and the rate on the rest of the estate, after gifts and allowances, is reduced from 40% to 36%. You can check whether your estate will be eligible for the reduction via the HMRC website.