Effective ways to reduce your tax bill by making charitable donations

In 2012, the United Nations designated 5 September International Day of Charity with the aim of  encouraging people from all over the world to help others through charitable giving and philanthropic activity.

According to the UK Giving Report (1), published by the Charities Aid Foundation, 2022 was the most generous year on record for charitable giving, with an estimated £12.7 billion made in donations. This was an increase of £2 billion on the previous year.

However, recent research carried out by Charity Link (2) suggests that the ongoing cost of living crisis is likely to have a detrimental effect on UK-based charities and the work they do.

The findings revealed that:

• 86% of charitable organisations are concerned about the effect cost of living challenges will have on those that depend on their services.
• More than 80% of charities expect to face difficulties with increased running costs, as well as managing wage increases.
• More than a third anticipate their organisation will struggle to survive in the current economic climate.

These figures make it clear that, despite the recent record level of charitable donations, as the next International Day of Charity approaches, charities need donations more than ever.

There are clear advantages of donating to charity

As well as the charities benefiting financially, there are several ways you can benefit from making charitable donations too. These include:

• Giving money to a good cause can provide you with a sense of wellbeing and peace of mind
• You are actively helping some of the most vulnerable members of society or those least able to help themselves
• You can donate to a specific charity that means a lot to you, maybe for personal or family reasons.

Furthermore, giving to a local charity can help strengthen your own community and improve your quality of life.

Tax breaks mean that there are financial benefits to charitable giving

As well as the clear altruistic and feelgood factors, there are also some financial benefits that you can gain through charitable giving.

These stem from steps taken by successive governments looking to encourage donations by creating a series of tax advantages.

Here are four of the most common tax benefits.

1. You can claim Income Tax relief through Gift Aid

Originally introduced in 1990, Gift Aid is designed to encourage charitable donations, and provides tax benefits for both the receiving charity and the donor.

The charity benefits from the government adding an extra 25p for every £1 you give, as long as it is registered for the Gift Aid scheme.

You can declare your Gift Aid donation on your self-assessment tax return. Basic- and higher-rate tax bands are extended by the gross charitable donation, increasing the proportion of your income taxed at the lower rates.

Furthermore, if you are an additional- or higher-rate taxpayer, you will normally lose £1 of your Personal Allowance for every £2 that your adjusted net income exceeds the current threshold of  £100,000. You can extend this by £1 for every £2 worth of Gift Aid donations.

Ultimately, donating through Gift Aid could help you keep more of your Personal Allowance and claim tax relief, potentially reducing your annual Income Tax bill.

2. Donating through a Payroll Giving scheme can reduce the Income Tax you pay

Often described as “give as you earn” (GAYE), many employers have set up Payroll Giving schemes. This means that donations to charity can be deducted from your salary each month prior to Income Tax being deducted.

While this reduces the amount of tax you pay, charities benefit from a regular monthly source of income that can help with their cashflow planning and budgeting.

Some payroll schemes will provide a set list of charities you can choose to donate to. Alternatively, others allow you to make your own selection – although your chosen charity must be properly registered with the Charity Commission.

If this is something you’re interested in, ask your employer about Payroll Giving and how you can potentially use it to reduce your Income Tax bill.

3. Making charitable donations can reduce your Inheritance Tax liability

Beyond immediate donations through Gift Aid and GAYE, longer-term donations to charity can be an effective way to mitigate your Inheritance Tax (IHT) liability as you plan your legacy.

The value of any donations you make to charity are taken off the value of your estate when assessing any potential IHT charge. Furthermore, unlike other IHT mitigation measures such as approved gifts, there is no limit to the donations you can make. This means that you can receive tax benefits, no matter how much money you choose to bestow to your charity of choice.

Additionally, if you include gifts to charity in your will, the net value of your estate will be reduced accordingly.

You should also bear in mind that if your total charitable donations make up 10% or more of the value of your estate, the rate of IHT payable reduces from 40% to 36%.

4. Donate land, property, or other assets and get Income and Capital Gains Tax relief

Making more substantial charitable gifts can help you mitigate the amount of Income Tax and Capital Gains Tax (CGT) you pay on the assets in question.

For example, you can deduct the value of any donation made to charity from your taxable income and, as a result, reduce the amount of Income Tax you pay in the same tax year.

Additionally, you do not have to pay CGT on any assets such as property and shares you give to charity.

In each case it is important to keep accurate and up-to-date records of all charitable transactions, so your tax liability can be assessed accurately.

Get in touch

If you’d like to talk to us about the tax advantages that can be gained through charitable donations, please get in touch. Email info@aspirafp.co.uk or call us on 01454 632 495.

Please note

The information contained in this article is based on the opinion of Aspira and does not constitute financial advice or a recommendation to any investment or retirement strategy.

You should seek independent financial advice before embarking on any course of action.

(1) https://www.cafonline.org/docs/default-source/about-us-research/uk_givin...

(2) https://www.charitylink.net/blog/cost-of-living-crisis-impact-uk-charities

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