Last updated: May 06, 2024

How giving to charity can reduce your tax bill

Noemie Williams DipPFS
Mortgage & Protection Adviser DipPFS at Mortgages for Doctors

How giving to charity can reduce your tax bill

Charitable donations have been dropping across the UK since 2016, with the cost-of-living crisis bringing an even sharper decline.

It’s not surprising, after all, people have less to give. The Office of National Statistics (ONS) reports that 92% of adults are feeling the pinch as prices continue to rise.

This is a shame because multiple studies show that charitable giving can have mental health benefits. As well as helping others, giving and volunteering are shown to:

  •    Reduce stress
  •    Improve emotional wellbeing
  •    Boost self-esteem
  •    Create a sense of belonging
  •    Increase feelings of happiness.

But, as well as these emotional benefits, there are also some monetary benefits. Namely, tax advantages.

If you’re a high earner, indulging in philanthropy could reduce your bottom line. Here’s how.

Make the most of Gift Aid

All donations in the UK are tax free – whether you’re a famous celebrity philanthropist, or just a regular joe.

It’s all down to Gift Aid. This benefit for UK tax payers repays the basic rate of tax (20%) on your gift, direct to the charity. They can claim an extra 25p for every £1 you donate, provided you’re a UK tax payer.

Good news for the charity, but what about you?

Well, donating through Gift Aid means your basic and higher rate tax bands extend by the gross amount you donated. This means the amount of your income taxed at lower rate increases, too.

Let’s look at the maths.

Say you’re a higher rate tax payer (40%) and you donate £100 to charity. The charity claims the 20% tax from HMRC as usual; however, you also benefit due to the fact that £125 of income that would have been taxed at 40% is now taxable at 20%. The result is that you receive additional tax relief of 20%.

Similarly, if you’re an additional rate taxpayer (45%), your income tax relief increases to 25%.

To claim higher rate tax relief, you must include details of your charitable donations on your self-assessment tax return or ask HM Revenue and Customs to adjust your tax code.

Reduce your Inheritance tax bill

It’s not pleasant to think about death, however, charitable giving in your will can reduce your inheritance tax (IHT) bill.  

Leaving more than 10% of your estate to charity reduces your IHT rate from 40% to 36%. As long as these ‘gifts’ (as the taxman calls them) are correctly set up, this could save your family thousands.

For even more of that feel-good factor, gifts left to qualifying charities are completely exempt from IHT – no matter how much you’re leaving to them.

Set up a charitable trust

If there’s a cause that you’re particularly passionate about, it might be worth setting up a trust.

As well as letting you focus on philanthropy, trusts are exempt from all taxes. This includes Income Tax, Capital Gains Tax, Inheritance Tax, Corporate Tax and Stamp Duty. You can also claim tax back on all donations made using Gift Aid – that extra 25p for every £1 donated.

You can either set up a trust during your lifetime or write it into your will to be created after you pass away.

To benefit from the tax advantages you need to prove that the trust is for a charitable purpose. For example the advancement of education, advancement of amateur sport or the relief of poverty.

It’s a great way to ensure the money you want to give is going to a cause that’s dear to your heart.

Would you like to explore charitable giving?

If you’re interested in increasing your philanthropic efforts, please get in touch. We can chat through ways to build charitable giving into your financial plan – benefiting you and those less fortunate.

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