Amanda Groombridge Assistant Accountant

Many individuals are consistently generous in their support of charitable organisations. What are the tax implications of charitable donations?

Broadly speaking, donations by individuals to a charity are tax free. You can make donations in various ways, including through Gift Aid, or from your wages or pension through a Payroll Giving scheme.

A charity can claim Gift Aid at 25% on donations if the individual has filled in a valid Gift Aid declaration form and has paid more tax than the amount of Gift Aid reclaimable.

Gift Aid donations ‘extend’ the basic rate tax band by the Gift Aid grossed up amount.

For Example:
•    £50,000 basic rate band - £12,570 Personal Allowance = £37,430 (taxed at 20%)
•    If you donate £2,500, this is grossed up (increased by 25%) to make £3,125.
•    The basic rate band is then extended:
£37,430 + £3,125 = £40,555

This means another £3,125 is taxed at 20% instead of 40%, a total tax saving of £625 if your income is more than the extended basic rate band.

If someone is not paying higher rate tax (i.e their total income is £50,000 or less) the extension of the basic rate tax band does not actually achieve a tax saving, but their donations will still qualify for Gift Aid as long as they do not total more than what they have paid in tax for that tax year.

If you have been very tax efficient in the year and you have only paid £500 in tax, but have donated £2,500 to a charity, you will not have paid enough tax to cover the £625 Gift Aid claim that the charity can submit. Therefore, your individual tax bill will increase by £125 to enable the charity to reclaim the full amount of Gift Aid.

So be careful – if you think you are going to be in a situation where the tax you pay is less than the Gift Aid claimable on your donations, it may be better if you are a company director to make the donations through your company rather than individually, as otherwise it will actually cost you tax.

If your income is taxed through PAYE (Pay As You Earn) you may be able to use a Payroll Giving scheme to donate to charitable organisations.

The donation is deducted before tax is calculated, but after National Insurance is calculated and deducted from your income. The tax relief you receive depends on the rate of tax you pay. To donate £1, you pay: 
•    80p if you’re a basic rate taxpayer
•    60p if you’re a higher rate taxpayer
•    55p if you’re an additional rate taxpayer

If you need any further help or advice on Gift Aid, donations or charitable finance, why not contact us and one of our consultants will be happy to answer any questions you may have.

Please note: This article is provided for information only and was correct as at time of writing (17/06/21). Lists and details provided above are not exhaustive and not intended to be full and complete tax guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.