The “generosity gap” – how donating to charity can help reduce your tax bill


A group of people decide to donate to charity on their tablet

The pandemic has been difficult on people and workplaces across the country, but non-profit charities are among the worst affected. The combination of a fall in donations and volunteers has made it tough for charities to continue their good work with the same intensity.

Adding to the troubles is the emergence of a “generosity gap” over recent years. The Guardian reports that, between 2012 and 2019, charitable donations from the top 1% of earners fell by a fifth, equating to more than £2 billion in donations lost.

To make a difference in 2022, charities need support. Luckily, donating to charity can benefit not only good causes, but you and your family’s financial wellbeing too. Read on to find out more.

You can make use of several schemes when donating to charity

There are several ways to donate to charity throughout your life, which will often give you and the charity you donate to the opportunity to claim tax relief. One such way is to donate through your monthly income, provided that your employer provides a Give as You Earn (GAYE) scheme.

The GAYE scheme allows you to donate to charity directly from your pre-tax pay and allows you to benefit from tax relief depending on the rate of tax you pay. So, if you are a basic-rate taxpayer, a £100 donation via the GAYE scheme would only cost you £80, as the other £20 is given through tax relief.

Any donations you make through the scheme are also deducted from your taxable income, which reduces the amount of Income Tax you pay each month.

You can also donate to charity through Gift Aid. The scheme allows the charity to claim an extra 25p for every £1 you donate (for basic-rate taxpayers) and usually only requires you to fill out a form, although you must be a UK taxpayer to sign up.

If you are a higher- or additional-rate taxpayer, Gift Aid can also benefit you. When you donate via Gift Aid, you can claim back the difference between your tax rate and the basic rate (20%) on the donation.

For example, say you are a higher-rate taxpayer making a £100 donation. The charity claims Gift Aid, which brings the total of the donation up to £125. You then claim back 20% of the donation (since you pay 40% tax), which gives you £25 back.

This must be done via your self-assessment tax return each year.

Lastly, you can also donate land, property, and shares to charity. Donating larger items like these could give you both Income Tax and Capital Gains Tax (CGT) relief.

Income Tax relief must also be claimed via your self-assessment, whereas the amount of CGT relief you get will depend on the value of the property or shares donated.

Donating after death is getting more common and can help to mitigate Inheritance Tax

Another way to donate to charity is to do so on death, by leaving a legacy in your will. While donating to charity on death is becoming more popular, most people don’t realise that it is an option or don’t realise the benefits that come with it.

A 2020 report from the Charities Aid Foundation found that only 5% of people have included a charity in their will, with a further 3% agreeing that they are likely to do so in the future because of the pandemic.

Despite relatively low numbers of people donating through their will, Co-op Legal Services report that about 13% of all charity income across the UK comes from legacy donations. They believe that without these donations, many charities and their positive impact would no longer exist.

Any donations that you leave to charity in your will are free from Inheritance Tax (IHT) and are not included when calculating the total value of your estate. This means that a large charity donation could be the difference between paying IHT and remaining just below the threshold.

If you are still likely to pay IHT on some of your estate, then donating 10% or more of your total estate to charity allows you to benefit from a reduced IHT charge of 36%, rather than the usual 40%.

Working with a financial planner can help you get the best out of charity donations

By working with a professional, you can donate your wealth to charity tax-efficiently in order to benefit you and your family. A planner can manage your wealth on your behalf to ensure the best possible situation out of available tax breaks and relief from charity donations.

If you’d like to find out more about how we could help you support good causes while also benefiting your finances, get in touch. Email or call us on 0115 933 8433.