Being charitable
Make sure you give tax efficiently
The big question is whether we are all donating as tax efficiently as we can. It was many moons ago now the Government at the time brought in Gift Aid to make charitable giving easier to administer. That has worked well and charitable donations in the UK have increased dramatically over recent years. Some of that may be as a result of TV related campaigns such as Red Nose Day and the like. But gift aid has no doubt helped as well.
How can gift aid help you?
Gift aid – the basics
The basis of gift aid is that the individual makes a gift under a gift aid declaration so that the charity can claim an additional 25% from the Treasury. In theory it’s as simple as that.
The donor must complete a simple declaration, normally in standard form and generally tick boxes when donating online. This must include:
- The donor’s name and address
- The name of the charity – which must be a registered charity in the UK (or most countries in Europe)
- Confirmation that the gift should be treated as a gift aid donation
- Confirmation that the donor is a UK taxpayer and pays enough tax to cover the tax to be reclaimed
Cash donations
By far the easiest and most common way of donating is in cash, by which we mean most means of monetary donation including online giving through e.g. Just Giving and Virgin Money Giving.
We’ll have a look below at how higher earners can maximise their donations, but let’s start by covering how it works for the vast majority of us.
What does a cash donation do for the individual taxpayer / donor? It results in their tax bands being extended by the amount of the donation effectively reducing the amount of taxable income at higher rates. For a 40% higher rate tax payer the effective tax relief is 25%.
In simplistic terms, where a higher rate taxpayer makes a donation of £80, the charity receives a further £20 in gift aid. The taxpayer receives gift aid relief of £20 too, so the net cost to the taxpayer is £60 and the charity receives £100.
That’s gift aid in it’s simplest form and that is how it is meant to and does work.
But there are bigger opportunities than that.
Do you receive child benefit?
If you do, then you could be even more tax efficient. Take a married couple with one partner earning £60,000. The other has no earnings but receives £1,788 in child benefit.
Because the working spouse earns over £50,000 all the child benefit gets clawed back from them as a tax charge! So what can be done to avoid this and be really charitable?
Well say they agree to make a donation under gift aid of what sounds like a hefty £8,000. This grosses up to £10,000 to the charity, and is set against the taxable earnings, now reduced to £50,000. This donation will actually “only” cost £4,212, because of £2,000 of tax relief on the donation AND as there is no longer a clawback of child benefit! So £10,000 to the charity costs the taxpayer just £4,212.
Are you a high flier?
Let’s look at someone earning £125,000. Because their salary exceeds £100,000 they lose all their personal allowances. As this is a high earner let’s take a fairly extreme example because it demonstrates the effect well. Say they make a donation of £20,000. The charity gets £25,000. What is the cost to the taxpayer – well they save £4,740 because the personal allowance is not clawed back, AND £5,000 tax relief. They save a substantial £9,740 – so for a net cost of just £10,260 the charity has received £25,000.
That is an extreme example but it’s real and it works
In a future article we will look at the potential to gift assets instead of cash, and the further tax benefits that can bring. We’ll also look at the pro’s and con’s of giving as an individual or through a business.
Please remember that each individual’s circumstances will be different and therefore you should take advice before making any decisions.
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
For new enquiries contact us now.
