Six Tips for Saving on Taxes When Giving to Charity…but Beware of Scams When Giving Generously
Give generously: Donations have fallen from £11.3billion to £10.7billion last year and could fall further this year
Donating to a good cause can help change lives for the better. But as the cost of living continues to rise, many charities fear donors are curtailing their generosity.
Donations fell from £11.3bn to £10.7bn last year and could fall further this year. But there are ways to donate that are tax efficient and can benefit the donor financially. Here are six top tax benefits for wise giving.
1) Claim a gift aid
Donations to charities by individuals are tax exempt. When you donate, be sure to tick the box to claim Gift Aid. This allows the charity to claim back any income tax you have already paid on your donation.
So if you donate £100 to a charity, they can claim gift relief at the basic income tax rate of 20%, increasing your donation to £125 free of charge extra for you.
But if you are a higher or additional rate taxpayer, the tax reduction is even more attractive. Since the charity can only claim a tax refund at the base rate, you can claim the balance. So if you pay 40% income tax, the charity will claim 20% and you can claim another 20%.
On a donation of £100, this means the charity can claim £25 and the donor can also claim £25. You can claim the tax refund by filing a self-assessment tax return or by contacting the tax and customs office directly and requesting a refund.
The benefit is even more generous for additional rate taxpayers who pay 45% tax – and in Scotland where top and additional tax rates are higher at 41% and 46% respectively.
2) Get money back when you donate goods
Many high street charity shops, such as the British Heart Foundation and Cancer Research UK, allow you to use Gift Aid for any donations you make, such as clothes, books and bric-a-brac. This increases the value of your donation and reduces your tax bill if you are a higher or additional rate taxpayer. Just check when you donate if you can sign up for Gift Aid. The charity should then let you know when the items you donated are sold and for how much they were purchased.
3) Refund on National Trust and Theater Memberships
Remember that Gift Aid applies to all registered charities. This means that if you are a member of the National Trust or are a member of an arts organization such as a theater or gallery registered as a charity, you should be able to claim Gift Aid.
4) Obtain an increase in child benefit
The High Income Child Benefit Tax will phase out a family’s entitlement to child benefit when one parent earns more than £50,000.
But giving to charity can help offset those losses. This is because when you donate to charity using Gift Aid, your taxable income is reduced by the amount you donate.
If your income is just above the £50,000 threshold, making a charitable donation can help bring it down, making you eligible for Child Benefit again.
5) Big payouts for high earners
Employees earning between £100,000 and £125,000 effectively pay a marginal rate of income tax of 60%. This is because not only do they pay 40% income tax, but their tax-free allowance is deducted at the rate of £1 for every £2 they earn above £100,000.
Donating to charity can lighten this burden slightly because taxable income is reduced by the amount of the donation.
Alice Pearson, partner at accountant Mercer & Hole, says: “Where higher rate tax relief for charitable giving is available, it is important to remember that this must be claimed – either by filing a tax return self-assessment or, if you are employed, by asking Revenue & Customs to change your tax code.
6) Reduce your inheritance tax bill
Testamentary donations to charities are exempt from inheritance tax. They raise £3.4billion annually for UK charities and account for 16% of all revenue raised.
You can also donate your pension to charity. If you receive a defined contribution pension through your employer, you can use a declaration of wish form to indicate whether you want a charity to inherit your pension in the event of your death. Of course, you should first discuss this with your loved ones.
You can also reduce the inheritance tax rate on your estate from 40% to 36% if you leave at least 10% of your estate to charity.
…but watch out for scams
While most charity fundraising is genuine, sometimes criminals try to take advantage of people’s generosity.
They do this by making scam calls that appear to be from genuine charities. It is therefore advisable to carry out a few checks before making a donation.
Never feel pressured to donate immediately. Take your time to ask fundraisers questions and verify street fundraiser ID badges, fundraising materials and information.
Be careful when responding to emails or phone calls, or when clicking on links from any organization claiming to be a charity.
Finally, check the charity’s name and registration number on the charity’s register at gov.uk/find-charity-information.