Charities carry out inspiring work that can transform and save lives.
From funding groundbreaking disease research to feeding the hungry and offering companionship to the lonely, charities often step in to fill the gaps left by governments, providing vital support where it’s needed most.
The Guardian reports that, after a considerable fall in donations in 2022, the British public donated a record £13.9 billion to charity in 2023. So, as inflation and the subsequent cost of living crisis have eased, it seems that the UK’s charitable spirit has returned.
While the main motivation for donating to charity is likely driven by your passion for supporting a meaningful cause, charitable giving can also benefit you or your future beneficiaries by reducing your tax bill.
So, with the recent passing of International Day of Charity on 5 September, read about three ways that supporting a good cause could also help you save on taxes.
1. You can reduce your Income Tax bill and charities can claim Gift Aid
Making a charitable donation through Gift Aid can benefit you and your chosen charity.
Gift Aid is a government programme that allows charities and community amateur sports clubs (CASCs) to claim back an additional 25p of tax for every £1 you donate. This is because 25p is 20% of the pre-tax amount you earned to make that donation. So, charities are eligible to claim back the basic rate of Income Tax you originally paid on your donations.
For instance, if you donated £1,000, the charity would receive £1,250 thanks to the Gift Aid scheme.
To claim Gift Aid, you usually need to complete a short form that the charity should supply. You then just need to give your name and address, along with a signed declaration that you pay enough tax in the UK to qualify – that is, at least as much as the amount the charity will reclaim from your donation.
If you’re a UK resident outside of Scotland and you’re a higher- or additional-rate taxpayer, you can claim further tax relief – the difference between your marginal tax rate and the basic rate – on your charity Gift Aid donations.
If you’re a higher-rate taxpayer, this means an additional 20%, and if you’re an additional-rate taxpayer you can claim an extra 25%.
So, for a £100 donation, you can claim back £25 if you’re a higher-rate taxpayer and £31.25 if you pay the additional rate.
Moreover, the tax-free Personal Allowance (£12,570 in 2024/25) is reduced by £1 for every £2 of income above £100,000. However, Gift Aid donations extend the £100,000 threshold, restoring the Personal Allowance by £1 for every £2 of gross Gift Aid donations.
The combined effect of the tax relief and the restored Personal Allowance gives you an effective rate of tax relief of 60%.
To claim additional relief, you need to fill out a self-assessment tax return and include the details of all your Gift-Aided donations in the charitable giving section.
2. Payroll giving is a tax-efficient method for donating to charity that can also reduce your taxable income.
If your employer, company, or personal pension provider operates a “payroll giving” or “give as you earn” scheme, you can make tax-efficient donations before your income is taxed.
This reduces the amount of admin for you and your chosen charity, and it means you receive immediate tax relief by reducing your taxable income.
So, depending on your marginal rate of Income Tax, to donate £100, you would pay:
- £80 if you’re a basic-rate taxpayer
- £60 if you’re a higher-rate taxpayer
- £55 if you’re an additional-rate taxpayer.
Because your taxable income is reduced, you will pay a smaller portion of your earnings in tax as well as making a tax-efficient donation to a cause you feel passionately about.
3. Including charitable donations in your estate plan can help reduce your Inheritance Tax bill
Charities rely on much of the funding they receive from Wills.
Research reported by Which found that 38,000 people left an estimated total of £4 billion to around 11,000 charities in their Wills in 2023.
Any money you leave to charity does not form part of your estate for Inheritance Tax (IHT) purposes. So, including donations in your estate plan could reduce the amount of IHT your beneficiaries may need to pay when they inherit your estate.
Moreover, if you donate at least 10% of your net estate to charity, the IHT rate charged on the rest of your estate decreases from 40% to 36% (in the 2024/25 tax year).
The donations can be cash (known as a “pecuniary legacy”), but they don’t have to be. You can also bequeath a “specific legacy”, whichallows you to leave a certain asset, such as a piece of jewellery, to your chosen charity.
Moreover, if you want to donate a portion of your estate to charity but want to ensure other debts and costs are covered first, you can leave a “residual legacy”. And you can also stipulate in your Will that a gift should be given to your chosen charity only if another event occurs, such as one of your beneficiaries dying before you.
If you plan to include a charitable donation in your will, it’s a good idea to discuss it with your family and loved ones so they understand your wishes.
Get in touch
Donating to charity not only supports a cause you’re passionate about but can also lower your tax bill and provide a boost for your beneficiaries.
To find out how to ensure your donations can be most effective, get in touch.
Email us at hello@vwmwealth.com or call us on 0141 229 4004.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
