Millions of people support honourable causes every year and donating to charity close to your heart can be deeply rewarding. Whether it’s supporting fundraiser or setting up regular contributions, with over 150 thousand charities registered in UK, there are plenty of good causes to choose from. But did you know that you or your business may be able to claim tax relief on donations? In this article we explain charitable donation tax reliefs to help support your chosen causes in the most tax efficient way.
When you are a UK tax payer and donate part of your income to registered charity, then the charity can claim so called Gift Aid. The Gift Aid is HMRC tax incentive which allows charity to claim giver’s tax on top of donation. Example below illustrates how incentive works for a basic tax rate tax payer.
If you are donating £100, your contribution is grossed up by basic tax rate (20%) and the total the charity will receive is £125 (£100 from you and £25 from HMRC).
In order to make a claim, the receiving charity requires your needs written or verbal declaration of contribution. It is usually done at the point of making a donation. This is important as you have to certify that you have paid enough tax for HMRC to be able to pay out Gift Aid. If you are a higher band tax payer, you will also receive tax relief by making a personal donation. This is done on your tax return by extending your basic rate band by the donation amount you have made.
As in example above, if you are donating £100 the charity will still receive £125 (extra £25) and additionally your basic rate band is extended by £125. This means that you will receive an extra £25 tax relief.
One thing to keep in mind is that by making Gift Aid declaration you are confirming that you have paid enough tax for the tax year and it covers the relief that the charity is claiming. If you have already made a Gift Aid donation and not paid any tax, you will have to pay back to HMRC the amount claimed by charity.
Donations through the company
Similarly to an individual, any company registered in UK can also make charitable donations and benefit from tax relief. Donations are treated as allowable expense, which reduces the company’s taxable profits, therefore effectively reducing corporation tax bill. In order to claim tax relief you need to make sure that a supported charity of your choice is registered in UK and that you keep relevant documents.
Charitable donations can only reduce profits but they will not create or increase the loss. Example of that is where the company is making the donations of £200, but only achieved £100 worth of profit. In this case donation will only reduce the profit to nil without creating loss.
Another thing to remember when contributing through the company is that your chosen charity won’t be able to claim Gift Aid.
Given something in return
When you are making a contribution but are given something in return, you may be a risk of loosing tax reliefs associated with charitable donation. The amount of maximum benefit received and contribution amount cannot exceed thresholds illustrated in table below, as otherwise it will not treated as charitable donation. This applies to benefits given to any person or company connected with your company, including close relatives.
|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)|
We hope that options illustrated in this article will help you make better decision. Whether your choice is to donate personally or through the company, please remember that charities are counting on your support and would be grateful for any contributions.
If you have any questions please do not hesitate to contact us.