How to give money to charity tax effectively

Russia's invasion of Ukraine has prompted an extensive relief effort from charities across the world. According to a poll by YouGov conducted on 11 March, 28 per cent of Brits had donated money to humanitarian efforts aiding Ukraine and further 34 per cent planned to. And these proportions are higher among those over the age of 50.

But when making charitable donations, it’s important to do it from the best tax position possible as it can make a big difference to the value of your contributions and personal income.

When you make a charitable donation, if you are a UK taxpayer tick the option to include Gift Aid. This means that the charity can claim an extra 25p for every £1 you give, effectively removing basic rate income tax on your contribution and paying it straight to the charity. The Charities Aid Foundation has found that charities are missing out on hundreds of millions of pounds as 23 per cent of eligible donors do not use Gift Aid when giving to charity – despite working more than 30 hours a week and paying income tax. Including Gift Aid has no extra cost for you, unless you have not paid the value of the Gift Aid in income tax or capital gains tax, in which case HM Revenue & Customs (HMRC) will ask you to pay back any Gift Aid claimed. 

If you are a higher or additional rate taxpayer, you can claim back the additional tax via a self assessment tax return. For example, if you donate £1,000 to a charity, it can claim Gift Aid and make your donation £1,250. If you pay 40 per cent tax on your income as a higher-rate taxpayer, you can claim back £250 on your tax return (£1,250 x 20 per cent). To claim the relief, indicate how much you've donated when you complete your self assessment form.

If you earn between £100,000 and £125,140 per year, reclaiming Gift Aid can be particularly valuable as you can reclaim it at a marginal tax rate of 60 per cent. This is because if your income is above £100,000, your personal allowance of £12,570 is gradually cut by £1 for every £2 of additional income. However, Gift Aid donations extend the £100,000 threshold by restoring the personal allowance by £1 for every £2 of gross Gift Aid donations, if your total income is between £100,000 and £125,140 per year.

If you earn between £50,000 and £60,000, and pay the High Income Child Benefit Tax Charge, making cash gifts to charity with Gift Aid lowers the net income on which your tax is calculated. Making pension contributions also reduces your taxable income.

You can claim tax relief for up to four years from the end of the tax year in which the donation was made. If you make a donation after 5 April and before you submit your tax return for the previous tax year, you can account for it in the previous tax year. This might be helpful if you have high earnings, but expect to drop a tax band in the year ahead or one of the situations set out above applies to you.  

Charitable donations are only tax deductible if you don’t get anything back from it. Andrew Robinson, partner at RSM, says that HMRC is “very hot on this” and it is an area where his firm spends a lot of time advising charities. For example, if you fund an exhibition which has your name on it, that could cause problems in terms of tax relief. 

Stefanie Tremain, director at Blick Rothenberg, adds that if you take part in a charity auction or raffle, you can only claim Gift Aid on money paid that is above the market value of the item you received. 

Company top ups

Some companies enable you to ‘give as you earn’ through payroll. This means that you do not have to claim Gift Aid yourself as your company does what is necessary. However, you still pay National Insurance (NI) on the value of your earnings donated, points out Gary Smith, chartered financial planner at Tilney Smith & Williamson. While salary sacrifice for charitable donations should theoretically be possible, in the same way in which many employees lower NI payments via pension contributions, Smith has not seen this done for charities.

Many companies, including Investors Chronicle owner Financial Times Group, are matching their employees' donations to charities supporting Ukraine. If you donate personally and have an employer, it’s worth checking to see if it will top up your contributions. Some pension schemes, such as ones provided by Aviva, are also matching donations, adds Tremain.

Transferring shares

You can transfer shares to a charity although Robinson says this is not very common. Although many large charities accept donations of equities, not all charities are able to. If you hold equities outside tax wrappers which have made large capital gains you can transfer them to a charity without paying capital gains tax (CGT). You can then deduct the value of the shares from your income for the year and reduce your own income tax bill. 

Alternatively, Smith says that HMRC rules allow you to sell your shares on behalf of a charity and not pay CGT on any profits, as long as you notify it of an instruction from the charity stating that you are selling the shares on the charity’s behalf. This is a good option if the charity wants cash rather than equities. 

However, depending on your capital gains position and whether you have high earnings, you might be better off selling the shares, paying CGT, donating the money to charity, and claiming Gift Aid and further tax relief. 

Leaving an inheritance to charity

Many people make charitable gifts in their wills. If you leave at least 10 per cent of your ‘net estate’ to charity, it can reduce the inheritance tax (IHT) rate your estate has to pay from 40 per cent to 36 per cent. Your net estate is the value of your assets above the nil rate band of £325,000 minus assets that do not qualify as part of your estate such as your pension. If you want to leave assets to charity, update your will regularly – experts suggest every five years. Tremain says that, for example, you could state that you want to leave 10 per cent of the value of your assets to certain charities, rather than ring fencing certain assets for them. This is in case the value of the ring fenced assets falls in proportion to your other assets and fails to meet the 10 per cent threshold at the point of your death.   

Robinson thinks that generally lifetime donations to charities are better than bequests in your will. The charities get the money sooner and, if you are a higher or additional rate taxpayer, the donation costs you less due to tax relief of 40 per cent or 45 per cent. 

However, Smith adds that it depends on your financial set up. If you have a large estate, reducing its IHT burden by 4 per cent could be more valuable than income tax relief on donations made. If you have a big lump sum you want to give to charity, it could be worth spreading this out over multiple years to avoid giving more than your taxable income in any one year and maximising your reliefs.

Setting up a charitable trust

You could set up a charitable trust, pay into it, gain tax relief, and keep control of how it is invested and when distributions are made. However, Tremain says that the high costs of doing this mean that you generally need to have at least around £500,000 for it to be worthwhile. Robinson “encourages people to think carefully” before setting up a charitable trust as these are subject to a lot of regulation and are expensive to administer. Giving to an established charity takes advantage of economies of scale and is less hassle for you.     

An alternative could be to set up an account with Charities Aid Foundation, better known as CAF. This enables you to carry out flexible giving, and manage your tax position by claiming Gift Aid and tax relief when money is paid into your account. A ‘donor advised’ fund is the preferred option for most donors, according to CAF. This can be set up with a minimum amount of £10,000 and paid into as regularly as you want, with distributions made to charities of your choice when you want.