FOOL'S EYE VIEW
Give To Charity And Save Tax

By James Carlisle
September 6, 2002

Giving money to charity has a long and proud history, taking in a multitude of great historical figures. Amongst millions of unsung heroes, the likes of King Hammurabi of Babylon, Moses, Buddha and Benjamin Franklin have all done their bit for charity. The great Chinese philosopher, Confucius, had it right when he said "he who wishes to secure the good of others has already secured his own". You can't say fairer than that!

Anyway, if you feel as though your good has already been secured, and fancy doing something for others, then make a donation to charity. Do it right and you and the charity can save tax at the same time. Tax relief on gifts to UK charities is available in three ways: for gifts under Gift Aid, for donations through a Payroll Giving scheme and for gifts of shares or securities.

Gift Aid

Gift Aid works by your chosen charity reclaiming basic rate tax on your gift from the Inland Revenue. So, if you give the charity £78, then the charity can reclaim the basic rate tax that you've paid on it. Since basic rate tax is 22p in the pound, then the charity could claim £22 from the Government, so that your gift of £78 is worth £100 to them. In fact, for each £100 given in this way, the charity can reclaim £28.20 from the Government.

If you're a higher rate taxpayer, then you need to claim back the higher rate tax yourself. Since higher rate tax is at 40% and the charity is claiming back the basic rate tax of 22%, there's 18% left for you to claim back. But it's 18% of the total that the charity gets, after the basic rate tax has been added on.

So, if you, as a higher rate taxpayer, give the charity £100, it will claim the £28.20 and pocket a total of £128.20. You can then claim back 18% of the £128.20, or £23.08. That means that the gift has cost you just £76.92, but the charity has benefited to the tune of £128.20. Not bad! (You might spot that £76.92 is £128.20 less 40%, so everything has come out in the wash.)

There are a couple of provisos to getting this tax treatmente. Firstly, you must actually pay at least as much in tax as the charity reclaims on account of your gift. After all, if you haven't paid any tax, then it's not exactly fair for you to make a tax-free gift. Or that's how the Inland Revenue sees it anyway. Also, you must not receive 'excessive benefits' in return for your gift (otherwise it wouldn't really be a gift).

You can make Gift Aid donations in any amount, large or small, lump sums or regular payments, by cash, cheque, postal order, direct debit, standing order, debit or credit card and even in a foreign currency. All you really have to do, on top of handing over the loot, is to make a declaration that you want the gift to be treated as Gift Aid. This can be done orally or in writing (eg by post, fax or email) and needs to give your name and address, the name of the charity, specify what gifts are covered (you can make one declation to cover regular donations) and say that you want them to be treated as Gift Aid. Generally, the charity will have a form for you to fill in.

Payroll Giving

Payroll Giving schemes are operated by many employers around the country. If your employer doesn't have one, why not ask? Although there's no obligation to run a scheme, there aren't many good arguments for saying no. As an extra incentive, the Government is currently adding 10%, on top of the tax relief, to gifts made through these schemes, although this is set to end in April 2003.

To give through a Payroll Giving scheme, you simply authorise your employer to deduct the gift from your pay each month. The employer will then hand over everyone's gifts each month to an approved Payroll Giving agency. The agency then distributes the cash to the different charities. Your employer doesn't need to know which charities you're supporting, by the way -- that's between you and the agency.

The gift comes out of your pay before it's charged to PAYE, so you automatically get tax relief at your highest rate of tax. So, a monthly donation of £10 will effectively cost you £7.80 if you're a lower rate tax payer and £6 if you pay higher rate tax. The charity gets your £10 and, until next April, it gets another £1 on top.

Gifts of shares and securities

Shares and securities, in this context means 'things' that are listed on the UK stock exchange, including AIM, or any 'recognised' stock exchange from overseas (which includes all the well-known ones). It also covers unit trusts, OEICs and certain forein equivalents. If you're not sure, you can check with the Inland Revenue.

You get the tax relief by deducting the market value of the shares, at the time of the gift, from your income for the year. You can also deduct any costs of transferring the shares. You do all this on your self-assessment tax return. If you don't normally need to complete a tax return, then you should contact your tax office.

You also don't have to pay any capital gains tax on any shares or securities you give to charity, even if they're worth far more than you paid for them.

If you have a small shareholding of little value, and there must be a few of us that qualify after the last couple of years, then you can make use of Sharegift. Sharegift will put your shares together with everyone else's, making a holding big enough to be worth selling. The proceeds then get passed on to charity.

More: Charity Fools discussion board; Inland Revenue Guide To Charitable Giving; Charities Aid Foundation; Sharegift