What are the tax benefits of donating to charity?

Donations to charity are tax deductible in most cases, so it’s important to make full use of them.

Most people have heard of Gift Aid. This allows registered charities to claim an extra 25p for every £1 donated by UK taxpayers who make the appropriate declaration. Less well known is the ability to claim relief personally if you pay tax above the basic rate. If your marginal rate of tax is 45% this could result in a rebate of £312 for every £1,000 you donate. This is based on 25% (i.e.45%-20%) of the donation plus Gift Aid (£1,250). If you are in this tax category it’s important to keep a record of all donations that you make so that you can make the appropriate claim on your tax return.

Donation Example

Donation amount £1,000 £1,000 £1,000
Marginal tax rate 20% 40% 45%
Tax relief Nil £250 £312
Net cost of donation £1,000 £750 £688
Gift Aid £250 £250 £250
Received by charity £1,250 £1,250 £1,250

Many employers operate a Give As You Earn payroll scheme which results in the exactly the same overall tax benefits but in a simpler way (at least as far as the donor and the charity are concerned). There are costs associated with running such schemes but these are usually paid by the employer. The range of charities available may be restricted.

Even greater tax benefits can be obtained by gifting certain types of assets (typically shares, land or property) which have appreciated in value because the latent capital gains tax is extinguished. Rates of CGT vary depending on the type of asset and amount of gain but can be up to 28%. Although these donations do not attract Gift Aid, the donor can claim the full cost against income (or capital gains) which achieves the same end.

Making bequests

Finally, there are incentives for including charities within your Will. All bequests to registered charities are exempt from inheritance tax and if these amount to more than 10% of the baseline amount (basically the total estate minus the nil rate amount and funeral expenses) then the rate of IHT on the WHOLE estate falls from 40% to 36%. In the example below, a donation of £50,000 reduces the funds available to descendants and other beneficiaries by only £12,000, equivalent to tax relief of 76%!

Legacy Example

Without donation With donation
Estate baseline amount* £500,000 £500,000
Charitable donation Nil £50,000
IHT payable £200,000 £162,000
Available to beneficiaries £300,000 £288,000

* Baseline amount is the size of the estate less debts, funeral expenses and the Nil Rate Band (if applicable).

Please note that taxation is complex and both bases and rates can change. We strongly advise seeking independent professional advice. See more about making bequests here

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