An understanding of the tax reliefs for monetary gifts to charity may encourage those considering a donation, says Richard Curtis.
Charitable donations have decreased over the past few lockdown-afflicted years and the current economic crisis is unlikely to help. However, not only do charities benefit from various tax exemptions, but the reliefs available to individual donors can enhance the value of donations to the recipient.
An employer can establish a payroll giving scheme to enable employees to make regular tax-free gifts from their salary, but one-off donations are more likely. When making such donations, it is common to sign a Gift Aid declaration. In brief, this means that the amount donated is treated as being made after the deduction of income tax at the basic rate (20%). So a gift of (say) £80 in fact represents a donation of £100 from which the donor has deducted £20. This tax deduction does not have to be paid to HMRC so long as the donor has paid an equivalent amount in income tax or capital gains tax during the tax year. The charity can then reclaim that £20 deduction, thereby increasing the value of the gift by 25%.
Fiscal drag...
A common tax complaint – heard increasingly as inflation rises – is the effect of ‘fiscal drag’. Increasing wages are always welcomed, but this may push taxpayers into higher tax brackets and this is particularly the case because the personal allowance and higher and additional rate thresholds are frozen until 2025/26.
However, donations to charity are eligible for tax relief at the highest rate paid by the donor. So, if the donor is subject to tax at 40%, their basic rate tax threshold is increased by the grossed-up amount of the gift. The effect on our donor of £80 cash is that a further £100 of their income remains taxed at 20% rather than being subject to a 40% liability, thereby saving them £20 tax. Consequently, that £80 gift has, in effect, cost them only £60, while the charity receives £100. A further £5 tax reduction would be obtained if the donor was subject to tax at the additional rate of 45%.
…and higher liabilities
In some circumstances, higher income tax relief can be obtained.
For example, if the donor has dividend income taxed at the higher rate of 33.75%, extending the basic rate band by a charitable gift could mean that this is taxed at 8.75% instead, saving 25%. Further, those who are starting to lose personal allowances when income exceeds £100,000 or who may have to pay the high-income child benefit charge when income exceeds £50,000 may also benefit from increased tax relief as a result of a charitable donation.
Carry back of relief
If the donor had a higher tax liability in the previous tax year, the relief for a charitable donation can be given in that earlier year instead of the one in which the donation was made.
A claim must be made when (or before) the tax return for the year of donation is made, but this can be useful for those wishing to maximise the available tax relief.
Conclusion
Tax reliefs are also available for gifts of assets, whether during the donor's lifetime or in their will and these may be worth investigation.
Ultimately, gifts to charities are made for altruistic reasons, but a high rate of tax relief can be an additional incentive.
Practical tip
Do not sign a Gift Aid declaration unless you are paying tax equivalent to at least 25% of the net donation.
