Can I save tax through charitable giving?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
Giving to charity is not only a noble act by contributing towards a good cause. It can also help with mitigating a tax bill. Below, our Lincolnshire financial planners show how this works in practice for gifts made by UK taxpayers.
This guide covers gifting salary, shares and more in relation to charity and tax planning. We hope this information is helpful to you. To discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Giving salary
The most familiar tax faced by employees in the UK is income tax. In 2023-24, the Basic Rate is charged at 20% on earnings between £12,571 to £50,270. Once an individual enters the Higher Rate (£50,271 to £125,140), however, the rate jumps to 40%.
For those nearing a higher income tax bracket, charitable giving from salary can be a useful way to keep out of it. In particular, some employers offer “payroll giving” (e.g. CAF Give As You Earn) which lets employees give directly to charity – before tax is deducted.
This means that charitable donations can cost a taxpayer less. Moreover, it can help to keep him/her out of the Higher Rate. For instance, suppose your salary is set to rise from £52,000 to £55,000 per year in 2024. Without planning, this would push you into the Higher Rate.
However, suppose you decided to engage in the above CAF scheme and donate £3,000 (pre-tax) to charity. This would keep you within the 20% basic rate and could be helpful for other areas of your tax plan (e.g. letting you keep your £1,000 yearly Personal Savings Allowance, rather than it reducing to the £500 available to Higher Rate taxpayers).
Some employers offering the CAF scheme will even match their employees’ donations, up to a certain point. This stretches your contributions further towards the good causes you care about. Contributions can also be adjusted quickly, allowing for tax planning flexibility.
Giving shares
Certain shares can be given away by a UK taxpayer and receive income tax relief on their value. In addition, they can be exempted from capital gains tax (CGT). To access these tax reliefs, the shares must meet the qualifying criteria set out by HMRC.
Shares can be gifted in many different ways – with each option having its pros and cons which the taxpayer will need to consider carefully. For instance, for one person, it may be most tax-efficient to donate the shares. Another person may prefer to sell the shares and donate the proceeds to their charity of choice.
Gift Aid
Many people are vaguely aware that Gift Aid can help to “boost” the value of their donation to registered UK charities. However, fewer people know that Gift Aid can also help mitigate a personal tax bill (for the giver).
If a Higher Rate or Additional Rate taxpayer makes a Gift Aid donation, their Basic Rate tax band is effectively “extended” by the gross charitable donation. This means that more of your income could be taxed at the 20% rate, rather than 40% or 45%.
For instance, if a Higher Rate taxpayer donates £100 to charity, they extend their Basic Rate tax bracket by £125. This means that £125 of their income is now taxed at 20%, not 40%. However, the potential benefits are even greater for Additional Rate taxpayers.
Suppose a taxpayer earns £125,140 per year. At this point, their tax-free Personal Allowance “disappears” due to the taper rules (i.e. the £12,570 allowance is reduced by £1 for every £2 earned over £100,000). In practice, the taper leads to an effective 60% tax on income between £100,000 and £125,140, which can feel very punitive!
However, by using Gift Aid, the taxpayer can start to get their Personal Allowance back. This is because these donations extend the Personal Allowance threshold. For example, suppose the taxpayer gives £1,000 away using Gift Aid. This means that their Personal Allowance will start to taper at £101,000 rather than £100,000.
Inheritance tax
There are special rules about charitable giving and inheritance tax (IHT) which can be useful for estate planning. In 2023-24, if at least 10% of someone’s net estate is left to registered UK charities, then the IHT rate is reduced from the normal 40% to 36%.
Is this worth it? It partly depends on your goals. If an owner wishes to minimise the amount taken by HMRC from their estate when they die, then the answer can be yes. However, if they want to maximise the amount of wealth left to their beneficiaries (e.g. children), then the answer will be no (since 10% of the net estate is going to charity, not them).
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
