The joy of giving: Tax reliefs when donating to charities
To mark Payroll Giving Week and following on from World Religion Day, Reshma Johar explores the valuable tax reliefs available when individuals make donations to UK registered charities.
Many charities including faith-based religions have suffered during the pandemic and lockdowns, as they relied on people attending events or places of worship to make cash donations. As with businesses, charities including places of worship have had to adapt to reach out for donations.
Most religious faiths will stipulate or guide how much of a person’s income should be donated to charity, otherwise referred to as a tithe.
Muslims who follow Islam are required under Zakah to give at least 2.5% of their net earnings (after paying bills and what is necessary) to a charity. Sikhs following Sikhism offer free meals to everybody, which is otherwise known as langar. Orthodox Jewish people following Judaism are required to give one tenth out of earnings to a charity or someone in need.
Currently there are two ways to make a tax-efficient monetary donation to charities; via Gift Aid or under the Payroll Giving Scheme. The article does not explore gifts to charities of shares, stock, securities or property.
Donations made by a UK individual will be treated as if they are made net of 20% basic rate tax. Charities will reclaim the 20% tax from HMRC. Gift aid also applies where gifts are made to a Community Amateur Sports Clubs (CASC).
An example of how a donation under gift aid is treated: if an individual donated £100 to a charity and used gift aid, the charity will receive a further £25 from HMRC, making the gift total £125 as received by the charity.
For individuals who are basic rate taxpayers no further tax relief will be available. However, individuals who are higher rate or additional rate taxpayers will be able to benefit from their basic rate and higher rate income tax bands being extended by the gross donation made.
In respect of personal allowance and married couples allowance restrictions, the gross gift aid donation will be deducted when working out the adjusted net income.
Individuals who pay little or no tax in the UK should be aware that in order to use gift aid, they would need to have paid enough tax to cover the basic rate tax the charity would reclaim. If not, they would be required to pay the difference over to HMRC.
Donations can still be made by individuals who pay little or no tax. When doing so they will have a choice of whether to tick the gift aid declaration section of the form or website. If the donor does not tick the gift aid declaration, the charity is not be able to collect the 20% gift aid relief.
Gift aid carry back
It is possible to carry back a gift aid donation made in the current tax year and treat it as being made in the previous tax year. In order to benefit from an early tax relief, the election needs to be made via a self assessment tax return which would need to be submitted on or before 31 January following the end of the tax year.
Make sure the gift aid counts
The donation declaration needs to confirm that the individual is a UK taxpayer, report certain personal details, as well as sufficient wording regarding to donation. Individuals who use someone else to make the donation of their behalf can’t benefit from the gift aid relief.
Charities receiving the donations must maintain an auditable records should HMRC require evidence. We have seen cases where insufficient records could result in individuals having their gift aid tax relief revoked, and the charity being required to pay back the tax repayments received in respect of donations received under gift aid.
A donation will not qualify for gift aid if the individual is expecting something in return such as goods or services. Examples of these include a payment to purchase a book, admission to events, raffle or lottery tickets, and payments of school fees for a specific person.
It is possible to make regular donations to a charity via PAYE. The donations are made out of gross income before tax is collected. For example, a donation of £5 a month costs an employee £4 from their take-home pay, where they pay 20% tax, or £3 if they pay 40% tax.
Individuals who donate to charities using payroll giving are not required to make any further disclosure to HMRC, including working out the adjusted net income for personal allowances and married couples’ allowance.
The charity is not required to apply for gift aid on the payroll gifted amount. Under gift aid the donations can only be increased by 25% for the charity regardless of the donor’s tax bracket, but payroll giving allows charities to receive the full tax relief.
Check it’s valid
Individuals making a donation should ensure it is a qualifying donation by making sure a gift aid declaration is maintained and retained as a record. Cash donations made can qualify for gift aid provided there is evidence of the donation, such as a receipt slip, which many charities offer.
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Reshma Johar is a Tax Consultant at Carter Backer Winter. She is both ATT and CTA qualified with experience gained from practice and her involvement with the CIOT. She has a particular interest in OMB and private client taxes.