Charitable donations are a great way to reduce your tax bill, and UK businesses and individuals can get relief from their donations. This blog post will guide you on how charity tax relief works and tips on making the most of it. Keep reading for more information!
The UK taxpayers making charitable donations enjoy tax relief on their donations. It is neutral for basic rate taxpayers, but the higher rate and additional rate taxpayers can claim additional tax relief when they file their self-assessment tax returns.
Tax Relief For Individuals Or Sole Traders On Donations:
As an individual or sole trader, you can donate through the following possible ways:
- Gift Aid
- Payroll Giving Schemes
- Donating Land and Property
- Leaving a Gift in your will
Donations Through Gift Aid
The taxpayers of the UK who donate in cash to the charities make Gift Aid declarations. Donations paid through Gift Aid allow the receiving charity to claim 25% of the extra amount on the total donations.
Tax Relief For Basic Rate Taxpayers
If you fall in the basic tax slab and donate £1000 to a registered charity, you can claim tax relief on Gift Aid. When processed, the receiving charity gets an additional refund of £250 as tax relief. But you, as a donor, will not enjoy any further benefit in this case.
Tax Relief For High Rate Taxpayers
If you are a higher rate taxpayer and donate £1000 to a registered charity, the charity can claim 25% of £1000, that is £250, as tax relief. Being a high rate taxpayer, you can reclaim 20% of £250 which is £50 on your self-assessment tax return to pay a lower amount of tax.
How To Qualify For Gift Aid?
According to HMRC guidelines, a charity can claim Gift Aid if the following criteria are achieved.
- You, as a donor, should be a regular UK taxpayer.
- The receiving charity should be a registered charity with HMRC.
If you have donated as a non-taxpayer and the charity has received a 25% of the relief as a refund, the HMRC can ask for this amount to be repaid.
Donations Through Payroll Giving Schemes
Employers or companies run payroll giving schemes by which employers donate directly from the wages or pension fund on behalf of employees. It is deducted from employees’ pay before tax is applied but after the National Insurance payment.
The charity getting donations through this scheme must be registered with the HMRC, and Community Amateur Sports Clubs are exempt from this kind of donation. Companies usually outsource payroll giving schemes to an agency and pay an administration fee for it. Companies can deduct this cost from business profits as an expense.
Donating Land, Property, Or Shares
When you donate your land, property or shares to a charity, you do not pay tax on it and it also includes selling land, shares, or property at a lower cost than their market value. Moreover, you can get relief on income tax and capital gains tax. Donations to Community Amateur Sports Club are not subjected to this relief. It is advisable to maintain your charity or sale records with the evidence that the charities have accepted the donations.
Income Tax Relief
You can enjoy tax relief on the donation of land or property and pay less tax by deducting the donation amount from the total taxable income for the year you donated.
How To Claim
You can claim tax relief in two ways, either you add this donation amount to your “charitable giving’’ section of the self-assessment form, which reduces the Self Assessment bill. And If you do not complete your tax returns, you can write to HMRC with gift details, and the donation amount will be compensated either through a refund or an updated tax code so that you pay less for that year.
Capital Gain Tax Relief
When you donate land, property and tax, you do not pay capital gains tax on it. Charity can also request you to sell on its behalf when you offer a gift of land, property or shares. If a company does so, it can still claim the tax relief. But make sure to keep a record of the details of the donation, and the charity’s request of sale. Without its record, you can lose this incentive and become liable to pay tax.
Leaving Gifts To Charity In Your Will
Your will states how your wealth or property should be dealt with or distributed when you die. Tax charged on the deceased person’s estate is called inheritance tax. The standard inheritance tax rate is 40% if the value of the estate (money, property, assets) exceeds the threshold of £325,000. This tax is paid from the deceased person’s funds.
Here is a tax incentive if the deceased person adds anything about charity to its will, that a part of possession is to be donated to a charity.
- You can enjoy a reduced tax rate of 36% on some assets if the value of the donation is more than 10% of the total estate.
- HMRC might provide you “taper relief” for some gifts. It means that you pay less than 40% inheritance tax. It is done for some gifts that you donate when you are alive but taxed after death.
- You can also get business relief which means that some of the assets might be completely free of inheritance tax or charged with a reduced rate.
Tax Relief For A Limited Company On Charitable Donations:
HMRC has also incentivised the companies if they make donations to charities. They are subject to lesser corporation tax when they donate money, equipment, land or property. Companies can avail of this tax relief incentive by deducting the amount donated from the total profits. It reduces the total taxable profits making them pay less tax.
Limited companies can donate:
- Equipment and trading stock
- Land, property and shares
- Seconding employees
- Sponsoring a charity
Let us discover each in detail.
A company donating money to a charity or Community Amateur Sports Club can deduct the donation amount from the business profit before paying tax. This way, companies pay less tax. Following payments do not qualify for tax relief.
- Loan payments that are repayable by charities.
- Payments are made on the condition that charity will make business deals or trade with your company or anyone related to the company.
- Are part of company profit distribution like Dividends.
Donating Equipment And Trading Stock
Companies also benefit from tax relief when they donate their equipment, products, or trading stock to a charity.
If a company donates equipment to a charity, it can claim full capital allowances on the equipment cost. Equipment can be office furniture, computers and printers, cars and other machinery. The company must already use the equipment to qualify for this relief.
When a company donates its stocks to a charity or Community Amateur Sports Club (CASC), it does not have to include anything in its sales for the value of the stock gift. It means that the company can get tax relief on the cost of stock (shares) it has donated.
A VAT-registered company needs to account for VAT on the items donated. It means the company can reclaim the VAT on the cost of stock donated. If your company donates items to charity that can then sell, hire, or export the items, you can apply Zero VAT on those items. If you can not apply zero rates to the items, use the rate you usually charge.
Tax Relief When Donating Land, Property, And Shares
Limited companies can pay less tax if they donate land or property or shares in another company to a charity. The donation made is capital gains tax-free, and companies can deduct the amount of Gift from the profits to get a less taxable amount.
Note: Donation or selling of these items to Community Amateur Sports Club (CASC) are not subject to capital gains tax but you can not deduct it from the business profits.
How To Work Out For It?
The company must keep a record of the donations or gifts as proof that a charity has accepted it. You need to keep its record for at least six years. The company also needs to get a certificate from the charity showing the details of the land or property donated and the Gift or sale date. Companies must get a statement assuring that the charity now owns the land or property. You need to work out the market value of the asset.
Companies fill out forms to transfer shares from their company to the charity. It can also be the case that when offering a gift, a charity might ask the donor company to sell on its behalf. The company can sell and still reclaim the tax relief. But the company must keep a record of the sale of the item and the charity request of selling on its behalf. Otherwise, the company might incur liability to pay incorporation tax.
A company can transfer their employees to charity, or they can volunteer to work there for a temporary period. The company must be paying the workers’ salaries for their services. It can set PAYE expenses and salary as tax-deductible as the employees would still be working for the company.
Note: Companies can not claim their employees’ costs of working at the Community Amateur Sports Club (CASC).
Sponsoring A Charity
It is a special kind of donation where limited companies get support or something in return from charities for their donations. Companies can deduct the sponsorship payments from business profits before paying tax treating them as other deductible expenses.
Payments qualify as a business expense if
- The charity supports your products or services.
- Allows you to use their logo and trademarks in your company prints.
- Allows you to sell your products or services at their event.
- And it also provides links from their site to yours.