As I write this article, Christmas is just around the corner and, generally, it is at this time of year that our thoughts turn to those less fortunate than ourselves. We are therefore more likely to put something into a collection box as the Salvation Army band plays Christmas carols at the local shopping centre, which in itself is laudable but from a tax perspective extremely tax-inefficient, both for the charity, and potentially for you.
However, there are two tax-efficient ways of making financial donations to charities: Gift Aid and Payroll Giving.
Gift Aid
UK taxpayers making online donations to recognised charities always have the option to pay via Gift Aid. This allows charities to claw back your tax from HM Revenue & Customs on either a one-off or regular donations, meaning your donation is increased by 25 per cent or more. All the charity needs is your name, address and a declaration that you are a UK taxpayer. As this declaration can be verbal, it can also be done over the phone.
This means that in practice, if you give £10 to a charity and you are a basic-rate taxpayer (20 per cent), you will have paid £2.50 in tax on the gross donation (to take home £10, you will have earned £12.50 before income tax). Gift Aid means that charities are able to reclaim this £2.50 back from HMRC.
In order to participate/qualify for Gift Aid you must be a UK taxpayer, but the donor need not be a UK resident provided that the gift is made out of income or capital gains subject to UK tax. In addition, the individual must have paid or will pay an amount of tax (income tax and/or capital gains tax), including, for example, any tax deducted at source and dividend tax credits that is at least equal to the amount of tax that all the charities and community amateur sports clubs (CASCs) that he/she donates to will reclaim in a particular tax year. If this is not the case, then the donor will have to pay the excess tax deducted from the donation to HMRC. For this reason it is important that non-taxpayers do not use the Gift Aid scheme.
If you are a basic-rate taxpayer, Gift Aid only applies to the basic rate of income tax. However, if you pay a higher rate of income tax, you will have paid either 40 per cent or 45 per cent. If this is the case you can claim the difference between the basic rate of tax and your highest rate on your self-assessment form if you make a Gift Aid donation. For higher-rate taxpayers on £10 that is another £2.50 and for additional-rate taxpayers it is a further £3.12 (so additional-rate taxpayers and their chosen charity can receive a total between them of £5.62 back from HMRC for a donation of £10 –56.2 per cent on top of the original donation).
It is also worth noting that in order to qualify for this tax benefit the charity/organisation must meet the UK tax definition of a charity and that this potentially includes certain organisations in EU member states, Norway and Iceland.
There is no minimum or maximum payment with the Gift Aid scheme. (George Osborne did try and introduce a limit to charitable giving that is available with tax relief in his 2012 Budget but subsequently back-tracked on this.)
Donations can be carried back to the previous tax year provided a carry-back claim is made no later than the date the donor submits his or her tax return and in any event no later than the filing deadline which is 31 October if you file a paper tax return, or 31 January if you file online. If you do not complete a tax return you can ask your Tax Office to send you a form P810 Tax Review – you must send this by no later than 31 January after the end of the tax year to which you wish to backdate your gift. But if you have already sent back your tax return you can only ask for the donation to be treated as Gift Aid for the current tax year. You can not change a tax return in order to carry back a donation.
Payroll Giving
As an alternative to Gift Aid, employees can make regular gifts of any amount in a tax-efficient manner through an employer’s payroll system. The employee instructs the employer to make regular payments by deduction from salary to a charity or a charitable clearing house. Donations are made out of income before income tax is taken off but after national insurance deductions. This means that donors are given tax relief on their donation immediately – and at their highest rate of tax.
If the amount of the payment is more than the employee’s pay from which tax is deducted, relief is restricted. There is therefore, as with Gift Aid, no benefit in non-taxpayers using this scheme. In addition as with Gift Aid there is no maximum or minimum payment under this scheme.
The main problem is employers must have a scheme in place; you cannot just do it on your own. Individuals should therefore ask their finance department if the firm runs a scheme. If not it may be worth trying to encourage it as it is a simple process that is run through the automated payroll. (Unfortunately, self-employed sole traders cannot access payroll giving.)
Advantages for the charity through Payroll Giving include the fact that your chosen charity or charities can receive your donation directly into its bank account before tax has been deducted so will not need to make a repayment claim, saving time and paperwork. The charity also receives the “gross” payment from higher and additional-rate tax payers.
Advantages for the donor include the fact that it can be anonymous – the employee does not have to agree to the charity knowing his name and employers will not know which charity an employee chooses to support. Some Payroll Giving agencies can supply a donor with a charity card or cheque book so that they can vary the charities they donate to. In addition the donor does not have to remember to give – regular gifts continue to be sent to the chosen charity for as long as the donor chooses, which, of course, is also advantageous for the charity in terms of cashflow – and the donor can cancel their payroll giving mandate at any time.
Conclusion
It is important to note that Gift Aid and Payroll Giving are only two ways of giving to charities tax efficiently. There are, for example, schemes to give assets such as shares or UK land tax efficiently, and there are IHT exemptions and a potential reduction in the IHT tax rate for those who leave a gift to a charity in their will.
But if you are going to give to a charity at Christmas, or indeed at any time, please consider doing it tax efficiently. There really is no downside, and you will help your chosen charity that little bit more.
Andy Gadd is head of research at The Lighthouse Group
Key points
Putting something into a collection box at Christmas is laudable, but from a tax perspective extremely tax-inefficient.
UK taxpayers making online donations to recognised charities always have the option to pay via Gift Aid.
Employees can make regular gifts of any amount in a tax-efficient manner through an employer’s payroll system.
