Donating to charity is a great way to help a good cause. However, there are also personal reasons why donating to charities can be a good idea, with one of the most important being the tax reductions that can be achieved. If you want to claim tax relief by making donations to charity, here is a quick guide so that you know what is involved.
Whenever you make a donation to a registered charity, you can state that it is a Gift Aid donation, and the charity can then reclaim the income tax at a rate of 20%. So, if you donate £1 to a charity, they will receive £1.20.
If you pay a higher rate of tax at 40% or 50%, the charity can still only claim back 20% of the tax. This means that you can claim the remaining 20% or 30% that you paid in tax.
How to Reclaim Your Tax
If you are in a higher tax bracket and you make any donations during the tax year, you can state how much you donated on your Self Assessment in order to receive the tax repayment. Alternatively, you can contact your local tax office or fill out a P810 Tax Review.
Restrictions on Reclaiming Tax
Although you can donate as much money as you want to charity, you should be aware that you will only be able to reclaim tax from your donations if they are made to a registered charity. Every charity that is registered with the HMRC will have a reference number, so make sure you check this before you make your donation.
Also, you have to pay enough income tax during the tax year to cover your donation. If you have not paid enough income tax then you will not be able to claim back the tax.
Another way for you to donate to charities is directly via your PAYE payslip. You can arrange this with your employer, and the donation will be made after National Insurance has been taken out, but before Income Tax is deducted. If you donate £100 in this way it will only cost you £80 (less for higher-rate taxpayers), making it an efficient and convenient way to donate money.
Inheritance is another way that you can donate to charity and pay less tax. If you donate 10% or more of your estate to charity, this will reduce the amount of inheritance tax that you have to pay on the rest of your estate. That means you could see inheritance tax go down from 40% to 36% if you donate 10% to charity.
You must make sure that you keep the records of any charitable donations you make, and you should keep these records for 22 months from the end of the tax year (or five years and one month for businesses).
These records include the amount that you donated, the date of your donation, the dates of any bank transfers, the receipts of any transfers, the receipts for cash donations that you make and any legal documents showing the sale or transfer of your assets to a charity.
Donate as Much as You Want
There is no limit on how much money you can give to charity, so you can donate as much as you want. Although Chancellor George Osborne announced earlier in 2012 that he wanted to cap the amount of tax that could be reclaimed from donating money to charity, this proposal was later scrapped. So feel free to continue to donate your money to charity and enjoy the tax benefits that come with it.
James McDonnel is a financial specialist. He regularly contributes to specialist financial sites like Nancy Kinder and Smarter Finance.