Tax relief for charitable donations
Individuals who donate to charity can do so tax-free. There are various ways of making tax-deductible gifts to charity. The way in which the relief works depends on how the donation was made.
Donations can be made in a number of different ways, through: –
as a deduction from wages;
a pension via the Payroll Giving Scheme;
a gift of land;
a gift of property.
A donation through Gift Aid is treated as having been made net of the basic rate of tax, allowing the charity to reclaim the tax element from HMRC. Thus, the amount given equates to 80% of the donation and the charity benefits from the remaining 20%. This results in every £1 given through Gift Aid being worth £1.25 to the charity.
To enable the charity to reclaim the tax, the donor must complete a Gift Aid declaration, in which the donor must confirm that they are a UK taxpayer. This is important, as the tax that is paid to the charity comes from the tax paid by the individual. If the individual has not paid enough tax to cover the tax claimed by the charity on the donation, HMRC may ask the donor to pay the equivalent amount in tax. Taxpayers who make regular donations and who have a Gift Aid declaration in place should check that they have paid enough tax. This may be important for pensioners who, following an increase in the personal allowance, find that they are no longer taxpayers.
Donors who pay tax at the higher or additional rate of tax
Individuals who fall under this heading will be able to claim relief of the difference between the higher or additional rate and the basic rate. This can be completed through their self-assessment returns and it is important that is not overlooked. Records of donations must be kept so that the additional relief can be claimed.
Payroll giving schemes enable employees to make donations to charity as a deduction from their pay and to receive tax relief at source for those donations. Employers wishing to operate a scheme must appoint a payroll giving agency. Details of approved payroll giving agencies are available on the Gov.uk website. The employer deducts the donation from the employee’s gross pay for PAYE purposes. The employer will then pay this over to the payroll giving agency. The payroll giving agency passes the donation on to the employee’s chosen charity. As the deduction is made from gross pay, no tax is paid on it. However, the employee will still pay National Insurance on the amount donated (as will the employer).
Gifts in a will
In the circumstances where a donation to charity is made in a will, two things can happen. The donation will either reduce the value of the estate before inheritance tax is calculated, or alternatively, if 10% or more of the estate is left to charity, the rate of inheritance tax will reduce by 10% from 40% to 36%.
Giving land, property or shares to charity
Income tax or capital gains tax relief may be available for donations of land, property or shares to charity. Income tax relief is given by deducting the value of the donation from total taxable income. This will relate to the tax year in which the gift was made to the charity. Relief is then claimed in the self-assessment return.
Where land, property or shares are sold to a charity for more than the cost, but less than their market value, no capital gains tax is payable.