In Charles Dickins’ A Christmas Carol, the miserly Scrooge is visited by two pleasant to behold gentleman, seeking charitable donations for the poor and destitute. Scrooge, true to his nature, having put the world to rights, offers nothing.
Had the two gentlemen explained the potential tax relief available to Scrooge, then maybe his ultimate generosity could have been weeded out sooner.
On that tenuous set up, Hark! at how your charitable donations at Christmas, and indeed any other time of year, are incentivised through the UK tax system.
Tax relief when an Individual, sole trader or partnership makes a donation
If a UK taxpayer makes a donation to a charity (a charity being defined as an entity registered with the Charity Commission), then tax relief is available at the basic rate via Gift aid to the charity.
Let’s say for example you donated £10 to a worthy cause, let’s say the RSPCA, the Charity would claim an additional £2.50 of gift aid from the Government.
Interestingly (or not), £2.50 is the figure because it’s 20% (i.e. the basic rate) of what you would have had to earn (£12.50) to take home the £10 that you donated. In other words, the RSPCA is being gifted your tax relief.
The donor must have paid at least the amount of gift aid being claimed by the charity, in tax to HMRC during the year. Therefore charities cannot normally claim gift aid from anybody earning less than the tax free allowance (currently and foreseeably £12,570).
The Gift aid scheme results in £1.6bn of government donations to UK charities. Essentially it’s us telling the government what causes we feel are important, with funds being diverted to those causes on our behalf.
Furthermore, higher and additional rate taxpayers can claim their additional relief via their self assessment tax returns. You can claim up to 4 years retrospectively.
Sole traders and Partnerships should not include their donations in their accounting records. They should be declared separately in the tax return, so that only higher rate tax relief can be claimed if available to them.
Tax relief when a company makes a donation
Corporate donations are treated differently in that all of the tax relief stays with the donor. Charities do not claim gift aid on donations from Companies.
Charitable Donations (provided they meet the definition) are deducted from the Company’s profits assessed for corporation tax.
Donations should be limited to the company’s in-year profit-before-tax (i.e. creating massive artificial losses for roll forward to next year is not permitted), and the donations should not represent concealed loans, dividend payments or anything else funky.
Other bits and bobs
Some other considerations:
No gift aid available to charities on payrolled donations. This is because full tax relief has been claimed at source.
You can donate land, property or shares to a charity instead of money, and gain the relief on the asset’s value
If you give to charity in your will, the donation will be deducted from the value of your estate subject to inheritance tax. Full relief is available for donations representing up to 10% of the value of the estate, partial relief thereafter.
Monetary donations to Community Amateur Sports Clubs (CASCs) are also subject to the same rules as registered charities.
Thanks for reading and have a wonderful, and possibly charitable, run up to the Christmas Holidays.
Further reading
Charity commission - https://www.gov.uk/government/organisations/charity-commission
HMRC guidance - https://www.gov.uk/donating-to-charity
CASC Info - http://www.cascinfo.co.uk/
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