Tax Treatments of Charitable Donations: a win win for companies and individuals
As a company that has social responsibility ingrained in its DNA, a number of charities benefit from our direct and indirect support. But do you know the tax rules, and do you know how it can benefit you or your company as well as the charity?
Companies
You can reduce your company’s corporation tax by donating money, equipment, trading stock, land, property or shares you hold in other companies. You can also continue to get full tax relief on the wage costs of any employees you second to a charity, or where the employee volunteers for a charity in work time. Of course, there are strict limits on how much benefit you can get from the charity in return for your donation. However, should you choose to sponsor a charity, this is a business expense rather than a donation and you are free to get benefits in return, the most common being promotion of your product or services on the charity’s website or at events.
As is always the case with tax, there are complexities, and the full guide can be found at www.gov.uk/tax-limited-company-gives-to-charity
Individuals, Sole Traders and Partnerships
This is where things get more complex, but also more rewarding. If you Gift Aid your payment, the charity receives £1.25 for every £1 you donate.
If you are a basic rate taxpayer, you will not get any tax relief yourself, but if you are a higher rate taxpayer you will get an additional 20% tax relief on the grossed-up donation. So if you donate £100, the charity not only gets an extra £25 to make that £125, but your tax reduces by £25 too (20% of £125). Effectively the tax system is subsidising your charitable giving!
This gets even better for you if you are in the 60% marginal rate band between £100,000 and £125,140 (2021/22 tax rates) or the 45% additional rate band. And it doesn’t end there – you can include any donations in the last 4 years (subject to them fulfilling the gift aid requirements).
Rates for Scottish taxpayers are slightly different but the same principles apply. One pitfall to beware of is that if you don’t pay enough tax to cover the Gift Aid claimed by the charity, you will be asked to repay the excess the charity has claimed.
You can also donate straight from your payroll or pension if your employer or pension provider operates a Payroll Giving Scheme.
Tax relief is not limited to monetary contributions – you can ethically avoid or reduce capital gains tax, and in some cases income tax, by donating land, property or shares or selling them to the charity at undervalue. As this could open up further tax planning opportunities, it is important to take professional advice before proceeding.
Finally, you can reduce your inheritance tax by leaving money or items to charity in your will. This reduces the value of your estate, and if you leave 10% or more of your estate to charity, you will also pay a reduced rate of inheritance tax on what is left! If this is of interest to you, please talk to our friendly Wills and Trusts division, based in our Holt Office (01225 690046).
Once again, there are rules to follow and complexities to negotiate, and the full guide can be found here www.gov.uk/donating-to-charity