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How to achieve tax efficiency with charity donations

on Friday, 10 November 2017. Posted in Financial management, Finance

Allowing them to save on tax when donating cash and assets, Gift Aid and charity bonds can help companies better support charities

How to achieve tax efficiency with charity donations

While saving money may not be your main concern when giving to a charity, it doesn't hurt to know that companies can reduce tax they pay through Gift Aid, the government scheme that enables charities to regain the basic rate of tax on every individual’s donation. This is most often used to boost the overall amount donated.

Moreover, Gift Aid can prove particularly useful when rolling out payroll-giving schemes where employees make donations regularly from their gross pay. These sort of schemes provide charities with a regular source of income, allowing them to plan ahead and more effectively utilise funds.

Moreover, Gift Aid can prove particularly useful when rolling out payroll-giving schemes where employees make donations regularly from their gross pay. The tax relief you receive depends on the rate of tax you pay. To donate £1 you pay 80p if you are a lower rate taxpayer, 60p if you are a higher rate taxpayer and 55p if you are an additional rate taxpayer. These sort of schemes provide charities with a regular source of income, allowing them to plan ahead and more effectively utilise funds.

Donating through Gift Aid means charities and community amateur sports clubs can claim an extra 25p for every £1 you give. If you are a basic rate taxpayer then, as the donor you only need to complete a Gift Aid declaration and the charity can make the claim. For example, a donation of £100 would enable the charity to claim an extra £25. Higher or additional rate tax payers can recoup the difference between their marginal and basic rate. Using the same example of a £100 donation, the charity will still claim the extra £25 and if you pay tax at a rate of 40%, you can personally claim back £25. In this instance the charity has received £125 but it has only cost you, the donor, £75. The donor’s claim can be made as part of their self-assessment or as an amendment to their tax code by HMRC. However, to do this, you must ensure that you retain all records of donations made.

If your income fluctuates from year to year or you want to claim your Gift Aid back quickly, you can enter any Gift Aid appropriate donations on the previous year’s return. You must file your tax return by the January deadline.

You can also claim Gift Aid and reduce your tax bill when donating shares, land and property to your chosen charity. This is possible because capital gains tax is not paid on charitable donations.

Alternatively, the market value of the donation is deducted from your income tax bill for that specific tax year. But if a capital loss has been made on an asset, you cannot cancel out this loss against other capital gains. Your inheritance tax liability can be reduced when donating money to charity. Leaving more than 10% of your estate to a charity reduces the amount of inheritance tax you must pay from 40% to 36%.

Another way to support good causes is through charity bonds. These are bonds issued by charities that enable them to expand their operations. As with all bonds, the receiver takes on debt to pay back the lender: in this case, the lender is the individual and the debtor is the charity. An exchange of a fixed amount is made with annual interest agreed in return for a set period of lending. However, charities must ensure they have a sustainable amount of revenue to repay the bondholders.

London’s Stock Exchange’s ORB platform makes the bonds issued tradable. They can be held in an individual savings account where interest is earned tax-free. However, liquidity is low on these bonds, which means individuals may struggle to sell the bond before it has fully matured.

This article comes to you courtesy of Myers Clark, the chartered accountants

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