Charitable tax relief is a way for individuals and limited companies to donate to registered UK charities tax-free and it may also benefit you when Self Assessment season comes around.
While there are many upsides to charitable giving, including helping your community and local organisations, there are a few tax related complications that may arise when it comes to cash donations. That’s not to say you shouldn’t donate or claim any available tax benefits you may be entitled to - rather you need to ensure you’re familiar with the giving process.
Gift Aid tends to be one of the most common forms of donation. This method of giving offers tax relief to either the individual or organisation - but donors need to watch out for any pitfalls that might preclude relief.
So, how do you avoid these potential issues while still benefiting from this type of charitable tax relief?
What is Gift Aid?
Gift Aid is a Government scheme that allows charities and CASCs to reclaim an extra 25% on cash donations from UK taxpayers. The Gift Aid scheme is voluntary and only valid if both the donor and the charity agree to it.
Donations that qualify for Gift Aid include single donations of money or property. It also includes regular donations, such as those made weekly or monthly through direct debit or standing order.
What are the tax benefits of a Gift Aid Donation?
When it comes to Gift Aid, a donor’s tax rate will determine the relief available and who will receive the tax benefit - the individual or the charitable organisation.
Basic Rate (20%) Taxpayers
Donors who fall within the basic rate tax bracket will see the benefit of Gift Aid go to the charity rather than to themselves.
So, if you are a basic rate taxpayer and give £10 to charity using Gift Aid, the charity will receive £12.50, because HMRC will add 20% tax relief to your gift, which means that HMRC adds 25p for every £1 you give in Gift Aid.
Higher Rate Taxpayers
If a donor pays tax at the higher rate (40%) they can also benefit from additional tax relief which is claimed through HMRC when they submit a self assessment tax return. These individuals can claim back the difference between the tax claimed by the charity at the time of the donation and the higher tax the individual pays.
For example, if you were to donate £100 to charity - they would claim Gift Aid to make your donation £125. You pay 40% tax so you can personally claim back £25.00 (£125 x 20%).
PAYE Charitable Giving
An individual can also make Gift Aid payments through payroll giving schemes or pension scheme payments, in this case those who pay the higher tax rate would be given any tax relief through their PAYE tax code and would pay less tax on their earnings.
Limited CompaniesWhile there is no Gift Aid on donations made by limited companies there are still tax reliefs on donations to charities. In this instance, the amount donated to the charity would be deducted from the profits resulting in a lesser taxable amount - meaning the company would pay less tax. |
5 Common Pitfalls of Gift Aid Donations
-
#1 Benefit received
Any benefit received in return for making a donation must be minor. An acknowledgement of the donor’s generosity – such as a plaque – is permitted but should not take the form of business advertisement or sponsorship.
When it comes to right of admission, such as a National Trust membership fee, the donation must be at least 10% more than the normal admission cost. For example, £11 would need to be paid for entrance that would otherwise cost £10. Alternatively, admission rights can be for at least 12 months during public opening hours.
-
#2 Gifts
Tax relief is not available for an individual membership or subscription gifted to someone else, such as a spouse or parent. However, this restriction doesn’t apply where a donor’s minor child is the recipient.
-
#3 Double counting
Where charitable giving is via a Charities Aid Foundation account, tax relief is given on donations to the account – not when donations are made from the account to charities. Therefore, be careful not to double count when claiming relief. The advantage of using a centralised charity account like this is that only one Gift Aid declaration need be completed.
-
#4 Record keeping
Don’t lose your paperwork! Keep any records in relation to the Gift Aid donation(s) as they may be required to support tax relief claims.
Also, keeping record is important if you have an ongoing donation through direct debit/standing order and decide to cancel your agreement with the charity to ensure you’re not liable for paying back HMRC on any tax relief that is over claimed by the organisation.
-
#5 Tax requirements
Donors need to ensure that they have paid enough tax, through either income or capital gains, in the relevant tax year to cover the tax the charity will reclaim. The donor must also inform the charity if they are on longer paying enough tax, if you don’t inform them and they continue claiming you’ll be liable to pay the difference back to HMRC.
How can DSA Prospect help?
Donating to charity is an amazing gesture, and while the aim is to help your local community and organisations doing great work around the UK - it’s important to remember that there are benefits for you too.
Contact a member of the team to discover how we can help you make the most of charitable giving tax reliefs, together we can discuss your financial plans and begin the tax planning process to help you effectively maximise your savings.
Disclaimer: The information shared on the DSA Prospect website and social media accounts (inclusive of all content, blogs, communications, graphics, guides and resources) is meant to provide helpful insight and discussion on various business and accounting related topics. It contains only general information that is subject to legal and regulatory change and is not to be used as an alternative to legal or professional advice. DSA Prospect Limited accepts no responsibility for any actions you take, or do not take, based on the information we provide and we always recommend that you speak with qualified professionals where necessary before making any decisions.