How you can support a worthy charity and enjoy tax relief at the same time

Supporting charitable causes is an excellent way to use your wealth, and it’s still a priority for many people despite the cost of living crisis.

According to the Charities Aid Foundation, people in the UK collectively donated £12.7 billion to charity in 2022. This is a significant increase on the £10.1 billion given in 2018 and shows that helping good causes is still important to us, even when other costs are rising.

That said, many charities are still recovering from the effects of the pandemic and still need your support. Luckily, donating to charity could also help you because you might see certain tax benefits.

Read on to learn the best ways to donate to charity and enjoy tax relief.

You can donate to charity from your earnings

Many employers run a give as you earn (GAYE) scheme. This allows you to make regular donations to charity from your income before tax, and you will benefit from tax relief on the payments.

The level of tax relief depends on your marginal rate of Income Tax. Each £10 you donate would cost you:

  • £8 if you are a basic-rate taxpayer
  • £6 if you are a higher-rate taxpayer
  • £5.50 if you are an additional-rate taxpayer.

This could be a useful way to mitigate a large Income Tax bill and support a worthy cause at the same time. You may need to ask your employer if they have a GAYE scheme set up.

Higher- and additional-rate taxpayers could claim extra tax relief through Gift Aid

Gift Aid is an excellent scheme that boosts the value of the donations you give to charities or Community Amateur Sports Clubs (CASCs).

When you make a donation, the government adds an additional 25% on top, so the charity benefits and it doesn’t cost you any more.

Also, if you are a higher- or additional-rate taxpayer, you can claim the difference between the basic rate of tax relief and your marginal rate of Income Tax.

For example, if you are a higher-rate taxpayer and you donate £1,000 to a charity of your choice, the government adds £250 on top. As your marginal rate of Income Tax is 40%, you can then claim £250 (20% of £1,250) for yourself through self-assessment.

Any donations you make will qualify for Gift Aid provided your total donations are less than four times the amount you paid in Income Tax and Capital Gains Tax (CGT) in that tax year.

Donating to charity could potentially reduce the Inheritance Tax your family pays

Finding ways to mitigate Inheritance Tax (IHT) may be important because it could reduce the amount that your loved ones inherit when you die.

Unfortunately, IHT receipts are rising and according to the UK government, they have raised £7.1 billion from the tax in 2022/23 – a significant increase from £6.1 billion in 2021/22.

If you are concerned about the IHT that your family may pay on your estate when you die, you might want to consider giving more of your wealth to charity.

This is because any charitable gifts you make do not count towards the value of your estate when calculating IHT.

In the 2023/24 tax year, your “nil-rate band” – the amount you can pass on without IHT – stands at £325,000. You can also benefit from an additional £175,000 “residence nil-rate band” when passing your main home to a direct descendant.

By making gifts to charity, you might be able to reduce the amount of your estate that exceeds your nil-rate bands, meaning your family pay less IHT.

Additionally, if you gift more than 10% of the total value of your estate to charity, the rate at which your family pays IHT falls from 40% to 36%.

As such, leaving a gift to a charity in your will can be an effective way to mitigate a large IHT bill. Legacy gifts are also a vital source of income for charities. According to Legacy Futures, 29% of all fundraised income for the top 1,000 legacy charities in England and Wales came from gifts in wills.

However, depending on the size of your estate, leaving more than 10% of it to charity may not be the most tax-efficient option for your wealth. It may be useful to seek professional advice before leaving a gift of this size to ensure that it is the most suitable option for you.

Get in touch

If you want to explore ways to give to charity and potentially reduce tax at the same time, we can help.

Please give us a call on 01276 855717 or email today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

Approved by the Openwork partnership on 03/01/2024.