If you’ve given money to a Christmas appeal or bought charity Christmas cards, you’re not alone as millions of us give money to charity every year.
When it comes to giving to charity, throwing a few coins in a collecting tin is all very well, but it’s not the best way to go about it. For a start, it doesn’t maximise the amount that goes to charity. With most donations, charities can reclaim tax on any money you give them, through Gift Aid, which means they get extra money at no extra cost to you. The pandemic has meant that many of us have cut back on the amount we donate, so it’s even more important to help the charity get the most out of any money you can afford to give.
Gift Aid on donations
If you donate through Gift Aid the charity can claim extra money from the government in the form of basic rate tax. There are several conditions that you (the person giving the money) has to meet before the charity can reclaim tax this way:
You must be a taxpayer. If you’re a higher rate taxpayer, you can reclaim the difference between basic and higher rate tax when you fill in your self-assessment tax return. If you receive tax credits, the age-related personal allowance or the married couple’s allowance you can effectively increase the allowance or credits you receive, because any money you donate through Gift Aid (plus basic rate tax) is deducted from your income.
You must pay enough tax in that tax year to cover the amount of tax the charity will reclaim (it doesn’t matter whether you pay income tax or capital gains tax). If you know you won’t pay much tax in the current tax year but you paid more last year (enough to cover donations you made last year and this year), you can backdate your Gift Aid donations. This means they’re treated as though they were made in the previous tax year. You can do this through your self assessment form, if you fill one in, or you can ask for form P810 (which you have to do via your local tax office).
You must fill in a Gift Aid declaration. This is normally a short form, but it should include certain information such as your name and address. Charities will usually provide you with this form when you make a donation.
Regular giving
In uncertain times, giving to charity every month may feel like quite a commitment, but regular donations are important to charities as they enable them to plan their budgets.
Your employer may operate a payroll giving scheme, which means your donation is taken off your pay before you receive it and before you pay tax. Tax relief is automatically added at your highest rate, which means it costs you less to make your donation. You don’t have to be employed to donate through payroll giving. If you’re receiving a company or personal pension and you pay tax on it through PAYE, you may be able to donate. If your employer or pension provider doesn’t run a payroll giving scheme, ask them if they’d consider setting one up.
You can give through a standing order or direct debit. With a standing order you set up a regular payment that only you can alter. With a direct debit, the recipient has the right to vary the amount you pay. However, charitable donations are different to paying a gas or telephone bill, because you agree in advance to pay a set amount. If you set up a direct debit, there should always be a record (the direct debit form you signed) of how much you agreed to pay and how frequently (monthly, quarterly, annually etc). If someone else (such as a street fundraiser) fills it in for you, take some time to check the details to make sure you know what you’ve agreed to.
Donating assets
It’s not just giving through your payslip that can be tax efficient. If you have shares, or money in a unit trust or open-ended investment company, you may be able to donate it to a charity or sell it for less than it’s worth and claim tax relief.
If, for example, you’re a 40% rate taxpayer and you give away £1,000 worth of shares, it will only cost you £600, as you’re able to claim tax relief at 40%. You also don’t have to pay capital gains tax.
You should check that the charity you want to donate to is able to cope with your unwanted shares (as not all can) and check with HMRC that you will receive tax relief.
If you only have a small number of shares that you don’t think it’s worthwhile donating, you can give them to ShareGift. This not-for-profit organisation bundles shares together until it has enough to sell and donates the proceeds to a wide variety of charities. It can cope with donations of one or two shares if that’s all you want to give away.
Leaving a legacy to charity in your will
Leaving a financial gift to a charity in your will can not only help them, but may also help you too. For example, if you’re facing a potential Inheritance Tax liability, there may be tax benefits if you leave a gift to charity in your will.
This is because any donations you make to charity are free of Inheritance Tax, and, if you leave at least 10% of your estate to a charitable cause, you can reduce the Inheritance Tax rate on the rest of your estate from 40% to 36%. Find out more about this and other ways to reduce potential Inheritance Tax bills in our guide Six ways to reduce inheritance tax bills.