In recent months, the outbreak of the coronavirus has impacted many sectors and industries with a loss of income, but the charitable sector has been hit particularly hard.
If you want to help a charity of your choice, there has never been a better time. Whilst there have been some spectacular examples of fundraising during the lockdown, such as by Captain Tom Moore, many charities have been struggling with loss of income and increased demand for their services.
Read on for five tax-efficient ways that you can help struggling charities.
1. Give directly through your salary
If you’re employed and your company has a payroll ‘Give as you Earn’ scheme, you can give part of your pre-tax salary directly to charity.
This can be a good way to reliably donate to your chosen charities each month. If you donate in this way you can also claim tax relief, depending on the amount of tax you pay.
For example, if you’re a basic-rate taxpayer (20%), giving £50 from your salary would only cost you £40. If you’re an additional-rate taxpayer (45%), giving £50 would only cost you £27.50.
2. Use Gift Aid
If you’re a UK taxpayer, charities can reclaim the rate of tax you paid on your donation through Gift Aid. This won’t cost you any extra and will give them a little bit more, as they can claim an extra 25p for every £1 you donate.
If you’re a higher-rate taxpayer, you can also claim back the difference between the higher rate and basic rate tax on the value of your donation.
For example, if you’re a higher-rate taxpayer (40%) and you donate £100 to charity, the charity can then claim Gift Aid on your donation of an extra £25, bringing the total value of the donation up to £125.
You can then claim back £25 (20% of £125), so not only is the charity getting a larger donation but you’re also saving some tax.
3. Give through Self-Assessment
If you’re entitled to a tax refund after completing a Self-Assessment tax return, you can opt to have it partly or entirely donated to a charity of your choice. This is called ‘Self-Assessment Giving’.
When you donate in this way, you can ask for the repayment to be made as a Gift Aid donation. This will allow both you and the charity to gain the benefits described above.
4. Donate through a limited company
Donating to a charity through a limited company can be a great way to help out charities of your choice whilst doing so in a tax-efficient way. However, the benefits of donating in this way largely depend on what you’re gifting to the charity.
- Money – When you gift money to a charity through a limited company, you can reduce the size of your Corporation Tax bill. This is because you can deduct the value of your donations from your total profits before you pay tax.
- Equipment or stock – Your limited company can also reduce the size of your Corporation Tax bill if it donates equipment or items it makes to a charity
- Land, property, or shares in another company – If your limited company gives or sells any of these to a charity, it could pay less Corporation Tax. If you give these to charity, or sell them for less than they’re worth, you won’t have to pay tax on capital gains. You can also deduct the value of the gifts from your business profits before you pay tax. However, please note that you cannot claim for gifts or sales of shares in your own limited company.
- Sponsorship payments – Charity sponsorship payments are different from donations, as your company receive something in return. You can deduct sponsorship payments from your profits before you pay tax by treating them as a business expense, but only as long as the charity publicly supports your company. For example, this may be by allowing you to use their logo in your printed material or allowing you to sell goods or services at one of their events.
5. Leave a legacy in your will
Whilst nobody likes to dwell on their own mortality, leaving a gift to charity in your will can be a useful way of both supporting a charity and reducing the tax bill that your family would have to pay.
When you pass away, you can leave everything to your spouse without paying any tax, but when they pass away, the value of your estate above a threshold called the nil-rate band will be liable for Inheritance Tax.
For the 2020/21 tax year, this threshold is £325,000 for an individual. However, there is also the residence nil-rate band, which grants a £175,000 exception on the condition that the main residence is passed to children or grandchildren.
Anything above this threshold is taxed at 40%, unless you leave it to an exempt body such as a registered UK charity. Any gifts left to a charity will not be counted towards the value of your estate, which will enable you to reduce the Inheritance Tax bill.
Furthermore, if you donate 10% or more of your estate to charity upon your death, the Inheritance Tax rate on your remaining estate will fall from 40% to 36%.
If you wish to leave a gift in your will to a charity, you can either:
- State in your will that you would like to leave a fixed cash amount to a named charity
- Leave a specific item to a named charity, such as a property
- Leave your entire estate, or a share of it, to charity once taxes, debts, and costs have been paid.
Get in touch
If you’d like to help a charity of your choice in a tax-efficient way, get in touch. Please email firstname.lastname@example.org or call 0115 933 8433.
Please note: The Financial Conduct Authority does not regulate estate planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.