Tax Efficient Charitable Giving at Christmas

5 November 2019
Jan Friend
Reducing Tax

Christmas is often a time to reflect on those not as fortunate as yourself and this will often lead to people making charitable donations. It is therefore worth refreshing ourselves on the tax implications of such gifts.

Provided the charity is registered as such then donations by individuals who are taxpayers should be made under the gift aid scheme – most charities will ask you to sign a declaration when you make your payment. If you are a taxpayer you should always do so.

The charity will then be permitted to claim back the basic rate tax from HMRC, so that your gift will be increased by £25 for every £100 you donate. In addition, if you are a higher rate taxpayer you will get £25 knocked off your annual tax bill for every £100 donated. So effectively you could give £125 to a charity for a cost to you of just £75. You could potentially save even more tax than that if your income is between £100k and £125k and you are losing part of your personal allowance, or if your income is between £50k and £60k and your household claims child benefit. It is also worth noting that charitable donations can be backdated one year, if this gives more tax relief. This can be really useful for taxpayers whose income fluctuates from one year to the next, such as the self employed.

Companies can also make donations to registered charities and such amounts will be deducted from the profits liable to corporation tax. So for a £100 company donation you would reduce your tax bill by £19. There is no additional amount to reclaim for the charity so from their point of view a gift-aided donation from an individual is preferable. However from a company director’s perspective it will often be better to use the company’s funds, rather than pay dividend tax on extracted funds used to make a personal donation.

There are restrictions on relief being claimed where the directors or anyone connected with them receives a benefit from the charity as a result of their donation, such as free tickets to a charitable event. If the value of the amount received exceeds the following no tax relief will be due:

Donation amount Maximum value of benefit
Up to £100 25% of the donation
£101 – £1,000 £25
£1,001 and over 5% of the donation (up to a maximum of £2,500)

Once Christmas is over you might find yourself clearing your cupboards to make room for all your new goods. If so you might consider taking your old ones to a charity shop. If you do there is also an opportunity to get some tax relief using the retail Gift Aid scheme.

This process is exclusive to charity shops that operate a retail Gift Aid scheme to sell goods on behalf of donors. To maximise the amount raised, charities can sell valuable or collectable items donated to a shop. This can be at a commercial public auction or an online auction website.

In practice the shop, auction or website will act as your ‘agent’ to sell your donated goods on your behalf and you pledge to give the sale proceeds (minus any commission charged) to the charity as a Gift Aid donation. That way the charity can claim the basic rate tax relief and you can claim higher rate tax relief as described above.

For example if you donate a suit which is then sold for £40, the charity is able to reclaim £10 basic rate tax from HMRC and a higher rate taxpayer obtains a further £10 tax relief – win win!

If you have any queries in respect of the above please contact Jan Friend.

The content in this blog is correct as at 05/11/2019. See terms and conditions.

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