Every day, thousands of charities around the world do incredible work to help those who need it. Many of these organisations rely on donations to fund the invaluable support they provide – from large, international charities such as UNICEF to your local food bank.
However, recent research by the Charities Aid Foundation (CAF) shows that fewer people are regularly donating to charity than before the coronavirus pandemic.
So, if you have a cause that’s close to your heart, they may need your support now more than ever.
The forthcoming International Day of Charity, taking place on 5 September, could be an ideal time to show your support for a great charity, and donating to a worthy cause could also have several tax benefits. Read on to find out more.
1. Donate through Gift Aid and reduce your Income Tax liability
Donating through Gift Aid could benefit both you and your chosen charity.
Gift Aid is a government scheme that enables charities and community amateur sports clubs (CASCs) to claim an extra 25p for every £1 you donate.
The charity or CASC will receive the basic Income Tax rate of 20% (2024/25) from HMRC, on top of your donation – so it won’t cost you any extra. For example, if you donate £10, your chosen charity will receive £12.50.
Claiming Gift Aid is simple to do. You’ll usually be asked to complete a short form that the charity will give you. They’ll need your name, address, and a declaration that you pay enough tax in the UK to qualify – at least equal to the amount the charity will reclaim.
Taking a few minutes to provide this information could make a real difference to a worthy cause. Indeed, Gift Aid is an incredibly important source of additional income for charities and CASCs.
Data reported by the government shows that £1.6 billion of Gift Aid at the basic rate of Income Tax was paid to eligible organisations in the 2023/24 tax year.
Yet, unfortunately, research published by the Charities Aid Foundation reveals that charities are missing out on more than £500 million of Gift Aid every year, as a quarter of eligible donors fail to claim this valuable tax relief.
If you choose not to use Gift Aid, you could lose out on tax relief too.
Higher- and additional-rate taxpayers in England, Wales, and Northern Ireland can claim back the difference between their tax rate and the basic rate of tax – which the charity or CASC claims.
The table below shows how much extra you could get in tax relief on a £100 donation (remember the charity has already claimed the basic-rate tax relief).
You can claim through your self-assessment tax return or by contacting HMRC and asking them to change your tax code.
2. Give as you Earn and benefit from tax relief
If your employer operates a Give as you Earn or “payroll giving” scheme, this is another way to make tax-efficient donations to charity.
These schemes allow you to give directly to charity from your pre-tax salary (through PAYE) or your pension.
The amount of tax relief you’ll get depends on the rate of tax you pay. For example, if you’re a higher-rate taxpayer (40% in 2024/25), giving £100 to charity would “cost” you £60. If you’re an additional-rate taxpayer (45% in 2024/25) donating £100 would only cost you £55.
Not only is this a tax-efficient way to donate to a cause that’s close to your heart, but it’s also a convenient way to donate regularly. This is crucial for charities that have seen a drop in the number of people making regular contributions since the coronavirus pandemic.
3. Leave a charitable legacy in your will to reduce a potential Inheritance Tax bill
Any gifts you make to a registered charity usually fall outside your estate for Inheritance Tax (IHT) purposes.
So, leaving a donation to charity in your will could reduce the amount of IHT your beneficiaries may need to pay when they inherit your estate.
What’s more, if you leave at least 10% of your net estate to charity, you may qualify for a reduced IHT rate of 36% – the standard rate is currently 40% (2024/25).
This could allow you to leave more of your wealth to loved ones while also providing support to your chosen charity after you’re gone.
There are several different ways to leave a charitable legacy in your will:
- A pecuniary legacy – Allows you to leave a fixed sum of money. This is the simplest and most common way to gift money to charity in your will.
- A specific legacy – Allows you to leave a specific asset, such as a piece of jewellery, to your chosen charity.
- A residual legacy – Allows you to donate some or all of your estate, once all other bequests, debts, and costs are covered.
- A contingent legacy – Allows you to stipulate that a gift will be made to your chosen charity, only if another event occurs, such as your designated beneficiary dying before you.
It’s important to keep your will up to date as your wishes may change over time. For example, you might want to change the charity you leave money to or amend the type of legacy you leave behind.
Talking to your loved ones about your plans could help to ensure that there are no surprises or disputes regarding the distribution of your wealth after you’ve gone.
Get in touch
If you’d like to incorporate charitable giving into your financial plan, we can help.
To find out more, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.
