At this point in the Jewish calendar between Rosh Hashana (Jewish new year) and Yom Kippur (Day of Atonement), it is traditional to be thinking about maximising your charitable giving. In this article I explore the options available to a business owner and give my recommendations about the best way to maximise the effectiveness of your charitable giving.
Gift Aid
Charities can register for the gift aid scheme with HMRC. This means that any donations made by individual tax payers from post tax funds will be supplemented by HMRC paying back the basic rate of tax the taxpayer has paid on those funds. In addition, higher rate taxpayers get relief on any higher rate tax by extending their basic rate band.
For example, if Mrs Bloggs earns £70,000 employment income per year and donates £400 to a gift aid registered charity:
The charity can claim an additional £400/ 80% x 20% = £100 gift aid rebate from the government.
Mrs Blogg's basic rate band is extended by £400 / 80% = £500, saving her tax of £500 x (40% higher rate - 20% basic rate) = £100.
If Mrs Blogg was a basic rate tax payer there would be no tax benefits to her for donating, but of course the charity she donates to would still benefit from the declaration.
Is it a gift aid donations?
Not all charitable donations are gift aid donations. Many charities do not register for gift aid, and many extremely worthy charitable causes - for example a GoFundMe to pay for medical treatments or legal bills - are often not legally charities.
Gift aid cannot be claimed in return for substantial goods or services. Membership of a charity is not substantial in this regards.
Gift aid cannot be donated by "in kind" services such as volunteering. Technically Gift Aid cannot be claimed on donations of goods, but HMRC is relaxed about a work around in charity shops in which the shop acts as your "agent" to sell the goods, and then you donate the cash proceeds.
Many "charity cheque" schemes such as that run by CAF or Achisomoch operate by claiming gift aid on the initial payment to the scheme provider. The onwards donation to the eventual recipient is not a gift aid donation.
Limited company owners
If you have a profitable limited company and are intending to donate a fixed amount from funds within that company to charity, it is more efficient to do this as an expense of the company rather than as a personal expense from extra money drawn as dividends or salary.
For example, if Mrs Bloggs was a higher rate tax payer who owned a company and wished to donate £500, the choice is as follows:-
Payment from Company
Donation £500
Less: corporation tax relief 19% x £500 = £95
Net cost: £405.
Payment from dividend
We need £400 of post tax income to make the donation.
The higher rate of tax on dividend income is 32.5% so we need to draw £400/ 67.5% = £592.59 of dividends.
Personal tax thereon is £192.59.
Donation net of gift aid is £400
There is higher rate gift aid income tax relief of 20%/80% x £400 = £100
So net cost is £592.59 - £100 = £492.59
It is therefore £87.59 cheaper to donate £500 as an expense of the company rather than as a personal donation from higher rate dividends drawn from the company. For a basic rate taxpayer, it is still £24.43 cheaper to make charitable donations as a company expense.
Business and charity
Businesses making a donation which can be shown to be "wholly and exclusively for the benefit of the trade" - for example sponsoring a local event - can claim a full deduction from some contributions which might be thought of as charitable but are not Gift Aid donations. This will result in a bigger tax saving for a higher rate taxpayer then a Gift Aid Donation - but at the expense of the loss of this extra tax saving in rebate available to the charity!
VAT must be paid on the sales value of goods donated to charity.
Gift aid and corporation tax
Companies can claim a deduction against profits chargeable to corporation tax for gift aid donations. Note that this is not a trading expense, and, so, for example, gift aid donations made by a company cannot be carried forward to future years or back to prior years if the company has no profits to offset the donation against.
Gift Aid clawback
Gift Aid is capped at the amount of income tax you have actually paid in each tax year. It is never a gift from the government to the charity concerned.
Do not gift aid donations when you are not a tax payer (because most of your income is from dividends, or because your earnings are less than the £12,500 personal allowance for example). Gift aid clawback applies in this scenario. HMRC will add the excess it paid to the charity onto your own self assessment tax bill. One potential solution which is sometimes available is that you can carry back excess donations to the prior tax year but you cannot carry them forwards.
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