We’ve all been there – a friend or colleague has decided to jump out of a plane or run a marathon in the name of charity and we receive a Facebook notification or an email asking us to sponsor them to do it. No doubt we’ve often gone ahead and donated a small amount and subsequently forgotten all about it. But if you’re a higher rate taxpayer you should be keeping track of these donations as they could save you tax.
What counts as a donation?
As well as regular or one-off monetary gifts to charity, donations can also come in the form of sponsorships, entry fees to certain museums and entry to charitable attractions. Don’t forget to keep your receipt in order to prove the transaction.
Donations qualify provided they are not more than 4 times the amount paid in tax in the tax year in question, and they must be made by an individual, a sole trader or a partnership (not a Limited company – they can donate in their own right but Gift Aid is not then applicable, so the tax relief is via Corporation Tax not Income Tax).
Gifts of shares or property to charity also qualify for tax relief, but the value reduces your taxable income rather than qualifying for Gift Aid. We’ll be covering these type of gifts in a future blog.
How does Gift Aid work?
A qualifying charitable donation will increase your tax bands by 8/10 – so donate £100 to charity and your Basic Rate Band upper limit increases by £125 (being £100/8*10) from £32,000 to £32,125, meaning you save tax on that income as it will be taxed at 20% rather than 40% (or 7.5% rather than 32.5% if it’s dividend income). This has a knock on effect on the Higher & Additional rate bands too, so your Higher Rate Band upper limit becomes £150,125.
Charity donations made after the end of the tax year can also be included if the return has not yet been filed, and provided you haven’t missed the filing deadline, so make sure you’re looking at your whole position across both the prior and current tax year before you file your return.
This is also useful if you are in danger of losing your personal allowance, as the £100,000 limit is based on net relevant income – that’s income after adjusting for pension contributions and charity donations.
The charity that you’re donating to gets your contribution and can then claim another 20% from HMRC, provided you certify that you’re a UK taxpayer.
Dividends and Gift Aid – a word of caution
As mentioned above, in order to allow a charity to claim Gift Aid the donor must certify that they are a UK taxpayer (income tax or capital gains tax). In prior years it has been perfectly possible to pay no tax at all yet still satisfy that criteria, as the dividend tax credit acted as “notional tax paid”. The dividend tax changes in 2016/17 mean that is no longer the case, so if you pay no tax but still give to charity under Gift Aid you will bear the liability for that Gift Aid on your tax return. The charity will reclaim 20% from HMRC under the scheme, and HMRC will reclaim it from you!
Gift Aid declarations stay in place until revoked, so if you will not be paying tax in 2016/17 but donate regularly to charity, it’s worth checking and possibly changing the status. If you run your own company you could consider a company contribution instead which may qualify for Corporation Tax relief, although the charity could not then claim the additional 20% Gift Aid from HMRC so your donation is worth less to them.
Donations and Inheritance Tax (IHT)
A final note whilst we’re here, in relation to the IHT implications of charitable giving. If your overall Estate is likely to exceed the IHT limits and tax is going to be payable, you could consider leaving a donation to charity as part of your Will. If more than 10% of your Estate is left then the rate of IHT reduces from 40% to 36% – depending on the value of your Estate this could be a considerable tax saving. Something to bear in mind as part of a larger discussion with your adviser about Estate planning.
What should you do?
If you are planning a large charity donation, check the level of your income to ensure the tax year it’s made in will give you the best overall tax result given the effects explained above – if you have only basic rate income in one year but higher rate income in another then it may be worth delaying the donation or allocating it to a different year if possible. Giving just £200 in the year you’re a higher rate taxpayer for example will save you £50 in tax. Not a massive amount, but better in your pocket than the taxman’s!
Please note that this blog is intended as an overall introduction to the subject matter, and should not be taken to be exhaustive or specific advice. You should discuss your individual personal circumstances with your own professional adviser before taking any action.