Tax relief on donations to charity

Gift aid is a scheme for charities and Community Amateur Sports Clubs (CASCs) to claim extra money from HM Revenue & Customs (HMRC). 

How do I claim tax relief for charity donations made under gift aid? 

For basic rate taxpayers, when they donate to charity, the advantage is to the charity. For example, Ben donates £100 to charity which has been funded from his income after tax. Ben had already paid tax on this money when he received it. When he donates through gift aid, the charity can reclaim the tax Ben paid on his £100 donation. 

However, for higher rate and additional rate taxpayers there is another step which means they can get tax relief on donations. A higher rate taxpayer is someone who pays tax at 40% in England, Wales and Northern Ireland or 42% in Scotland. An additional rate taxpayer is someone who pays tax at 45% in England, Wales and Northern Ireland or 45%/48% in Scotland. 

Higher rate tax relief on charity donations 

When a higher-rate individual donates to charity under gift aid and the charity benefiting, they will also get extra tax relief. 

For example, Lucy donates £100 to charity, the charity can still claim the basic rate tax from HMRC as it does for basic rate taxpayers. Lucy can also claim back the other tax paid on that income. 

Higher rate tax relief is achieved by increasing the basic rate band by the amount of the gross gift aid donation. Higher rate taxpayers can get higher rate tax relief if their income is at least the total amount of the donation. 

Donation	£100	>	Charity
Tax Lucy paid at basic rate*	£25	>	Charity
Higher rate tax relief**	£25	>	Tax relief

*The amount of basic rate relief (£25) is calculated as 20% of the gross income (£100 is net of tax) so £125 x 20%. 

**Lucy paid tax at 40% on £125 = £50. The first £25 goes to the charity, and Lucy gets relief for the balance (£25). 

How can tax planning for charity donations help your tax savings? 

Effective tax planning can ensure you pay the correct amount of tax and not a penny more. It helps you plan and make decisions based on your own circumstances. Speaking to an experienced accountant can help you plan your taxes more efficiently. 

Tax planning for higher rate taxpayers may include making gift aid donations to benefit from tax relief. Everyone’s circumstances are unique so seeking professional advice is always recommended. 

 

How is tax relief on charity donations claimed? 

Lucy can claim tax relief on donations through her self-assessment tax return. Keeping proof of charity donations in your tax records for at least six years is essential in ensuring you get tax relief. 

If Lucy does not prepare a self-assessment tax return, and her income is paid through PAYE, Lucy can get tax relief through her tax code. This means Lucy’s employer will take less tax from her wages. 

Changes to adjusted net income for charity donations 

Adjusted net income is your total taxable income before deducting your personal allowance, and after adjusting for some reliefs, including gift aid donations. 

Your adjusted net income is used to calculate your: 

• personal allowance 
•  personal savings allowance 
• married couple’s allowance 
• exposure to high income child benefit charge

A lower adjusted net income can therefore save higher rate taxpayers more tax. 

Carrying back charity donations 

When it comes to tax planning, it is possible to include a donation to charity on your prior year tax return. 

For example, if you donate to charity on 1st September 2024, you can include it on your 2023/24 tax return. This is true even though the donation was made after the tax year ended on 5th April 2024. 

This could be beneficial, and you should seek professional advice from an accountant to establish whether this is practical. 

Other things to consider when donating to charity 

• When planning for Inheritance Tax (IHT), any amount you leave to charity in your will is not taxed. Plus, if you leave at least 10% of your estate to charity when you pass away, if your estate is subject to IHT, the rate may be reduced from 40% to 36%. 
• If the amount of tax you’ve paid in the tax year does not match the amount of relief the charity will reclaim on the donation, you should not make donations under gift aid. 
• If you have a capital gain which is taxed at a mixture of rates, the extension of your basic rate band for donations could mean the amount of the gain charged at the lower rate is increased. 
• If your employer offers a payroll giving scheme, the donation is made before you pay tax on the income. You will still pay National Insurance Contributions (NIC). You can read more about tax relief on payroll giving schemes here. As the donation is made before tax is paid, this means the donations aren’t eligible for gift aid. 
• If you donate land, property or shares to charity, you don’t have to pay tax. 

Donating to charity from your business 

When a limited company donates to charity, they can include the amount on their company tax return by deducting the donation from their profits before tax. 

If a limited company gives equipment and items to charity, the company can get tax relief by claiming capital allowances on the cost. 

How TaxAssist Accountants can help 

Speak to our expert tax advisers at TaxAssist Accountants who can help you plan for your tax effectively. Call us on 01603 258690 or use our online contact form. 

 

Date published 1 Nov 2024 | Last updated 1 Nov 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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