Charity donations - a useful tax planning tool


Lauren Miller

Lauren Miller

Tax Senior Manager


The festive season will soon be in full swing and the spirit of giving and receiving at this time is high. This generosity often extends to charities, with research finding that 1 in 3 people say they are more likely to donate to a good cause during the run up to Christmas. With the spirit of giving in the air, who would be thinking about the effect a donation to charity may have on their tax position? 

Gift Aid

A donation, no matter how big or small is sure to be a welcome boost for any charity. Where a donor declares that their donation should be treated as being made under the “Gift Aid Scheme”, the charity receives an extra boost in the form of more cash.  How this works is that the donation, with a valid Gift Aid declaration, is treated as being paid net of basic rate tax, enabling the charity to claim an extra 25p from HMRC for every £1 donation. 

Higher rate and additional rate taxpayers

For higher rate and additional rate taxpayers making Gift Aided donations to charity, as well as helping out good causes, there is the added benefit of claiming additional tax relief. In simple terms, the additional tax relief is obtained by an amount equal to the gross charitable donations made in the year being added to the basic rate and higher rate tax bands. So, a £100 Gift Aid donation is actually worth £125 to a charity. For a higher rate taxpaying donor, £125 of their earnings will be subject to basic rate tax of income tax (21% in Scotland and 20% in the rest of the UK) rather than higher rate tax (41% in Scotland or 40% in the rest of the UK). The tax relief can be more for those subject to the High Income Child Benefit Charge or receiving a reduced personal allowance because their income exceeds £100,000 or they earn more than £150,000. 

Additional tax relief and overpayment relief

This additional tax relief for higher rate and additional rate taxpayers is claimed by completing the ‘charitable giving’ section on the Self-Assessment Tax Return.  If you’ve not previously claimed tax relief for your charitable donations, you can potentially make a claim to HMRC for “overpayment relief” for the previous four years. 

For those paying little or no tax, which is becoming more common following changes introduced on 6 April 2016 to the taxation of savings and dividend income, consideration should be given to whether to sign the Gift Aid declaration or not. Where the donor has not paid sufficient tax to cover the amount the charity reclaims from HMRC, the donor is liable to make up the shortfall. This would be calculated as part of the Self-Assessment Tax Return.  

Gifting assets

Donations and also the “Gift Aid” bonus is an important source of income for charities. With full consideration of the tax implications, giving cash or assets to a charity can be a really effective tax planning tool and spread Christmas Cheer! If you’d like to find out more, contact me: lauren.miller@jcca.co.uk or get in touch with your usual Johnston Carmichael contact.