What are the tax benefits of donating to a charity?

By donating to a charity or cause of your choosing, not only are you making an important donation to something you care about, you can minimise your income tax too.

There are multiple ways to save tax by giving money to charity – here's how to go about it. 

Can you reduce your income tax through charitable donations? 

While taxes are designed to raise money for the UK government, there are legal ways for people to reduce the amount of money they pay in taxes.

Recognising the value of donating to charities and organisations that need financial support, the government incentivises charitable donations by offering a level of tax relief for people who donate to charities.

There are a few different ways to reduce your income tax by donating to charities, which can be good for both your finances and the charity you are donating to.    

What is Gift Aid?  

Gift Aid is a way for certain taxpayers to reduce their income tax by donating to a charity or organisation.

By donating to a charity or community amateur sports club (CASC) and making a Gift Aid declaration, the charity or CASC can claim an extra 25p for every £1 you give at no additional cost to you. 

This makes Gift Aid a powerful tool for maximising the impact of your donation, whether you're giving today or leaving a gift in your will. 

How does Gift Aid work? 

Gift Aid allows charities to reclaim the basic rate of tax (20%) on your donations. For higher-rate (40%) and additional-rate (45%) taxpayers, it also allows for additional tax relief to be claimed.

Under current tax regulations, the current income tax thresholds mean that higher and additional rate taxpayers pay 40% and 45% tax on their income.

With Gift Aid, if you donate £100 to a charity, the charity can claim an extra 25p for each pound you donate, making your total donation £125 at no extra cost.

As a higher-rate taxpayer, you can claim back the difference between the 20% basic rate and your 40% tax rate, which amounts to an additional £25 reduction in your income tax bill.

Higher-rate taxpayers must declare these donations on their self-assessment tax return to receive additional relief. 

Charities need to be registered with HMRC to be able to claim Gift Aid relief, and you also need to make a Gift Aid declaration form.

How do you reduce inheritance tax through charitable donations? 

Inheritance tax (IHT) is a tax on a recently deceased person’s estate if valued over £325,000. It should be noted there is an additional "residence nil-rate band" of up to £175,000 that may apply when passing on a family home to direct descendants.

Effective IHT planning can help reduce the tax you pay, and charitable donations are one such way.  

While leaving a certain amount of money to your descendants can see a proportion of this money subject to tax, any money you donate to a charity is not.

Plus, when you donate 10% of your estate to charity, the IHT on your taxable estate drops from 40% to 36%, meaning leaving a portion of your estate to charity can be better for your descendants, too. 

This 10% is calculated on the net estate (after deducting the nil-rate band) to help avoid potential misunderstandings. 

What are payroll donation schemes? 

You can also claim some tax relief through payroll contributions. Your employer can allow you to make automatic donations to charity from your monthly pay or pension contributions.

These donations are not subject to income tax, but you still pay national insurance contributions. The exact amount of relief you receive depends on your marginal income tax rate.

For every £1 donated, a basic-rate taxpayer only pays 80p, a higher-rate taxpayer 60p, and an additional-rate taxpayer 55p after tax relief.

Can limited companies get tax relief from charitable donations? 

In the same way that individuals can claim certain tax relief by donating to charity, limited companies can also pay reduced corporation tax by donating to charity.

Eligible donations include financial donations, equipment or items sold by the company – land, property and shares – and sponsorship payments or employees working charitable days or on secondment to a charity.

Businesses can then deduct the value of the donation from the business’s profits before corporation tax is paid.  

Can you get tax relief on land, property and shares? 

Land, property and HMRC-approved shares can be donated to charities without being subject to tax.

Moreover, you can claim income and capital gains tax relief through these donations. It should be noted that only certain types of shares qualify for this relief (e.g., those listed on a recognised stock exchange), and some private company shares may not qualify.

How do you claim tax relief? 

Unless you are donating to charity through a workplace scheme, you can claim your tax relief by filling out a self-assessment tax return, where you can declare your charitable income and reclaim any tax relief you are owed.  

Get expert financial advice 

Charitable donations offer not only the satisfaction of supporting causes you care about but also significant tax benefits.

Whether through Gift Aid, payroll donation schemes, or by giving property and shares, there are numerous ways to reduce your tax liability while making a positive impact.

By understanding and utilising these tax relief options, you can maximise the value of your contributions and enhance both your financial and charitable goals.

Let Unbiased match you with a financial adviser for expert financial advice on maximising the tax benefits of your charitable donations.