Charitable Giving

October 11, 2006

Have you ever made a donation to charity? Of course you have! But did you do it in the right way? In other words, did you take advantage of the fact that making charitable donations can help both you and the charity to benefit from tax relief?

The Government is surprisingly generous when it comes to helping you give to charity. Essentially, as long as you're a taxpayer you can plan your giving to ensure that UK charities can reclaim basic rate tax on any donations. If you're a higher rate taxpayer, that you can even reclaim part of the tax paid on your contribution. Unfortunately, less than a quarter of donations are made in a planned and regular fashion so charities are missing out a great deal and so are the donors.

At the moment the Government permits tax relief on charitable donations in three different ways: for financial contributions under Gift Aid, for donations through a Payroll Giving scheme and for gifts of shares or securities.

Gift Aid

The Gift Aid scheme enables your chosen charity to reclaim basic rate tax at 22% on a cash gift from Revenue & Customs. So, if you give the charity £78, then the charity can reclaim the basic rate tax that you've paid on it thus ensuring that your gift 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 can claim back some 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.

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 treatment. 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 taxman 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, 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 declaration 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.

If you make donations to a number of different charities on a regular basis then it's worth investigationg the Charity Account from the Charities Aid Foundation.

Payroll Giving

Payroll Giving schemes are operated by many employers around the country. If your employer doesn't have one, why not ask if they're prepared to set one up?

To give through a Payroll Giving scheme, you simply authorise your employer to deduct your charitable donation from your pay each month. The employer will then hand over everyone's contributions each month to an approved Payroll Giving agency, who will then distribute the cash to the charity of your choice. 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 the full £10. Simple!

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 foreign equivalents. If you're not sure, you can check with the 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 hold only a few shares of little value then you can make use of a scheme called Sharegift. They'll collect your shares together with everyone else's, making a holding big enough to be worth selling. The proceeds then get passed on to charity.

Wills and charity

Any gifts to charity you make in your will are exempt from Inheritance Tax. Find out more about remembering a charity in your will. And if you haven't yet drawn up a will, and your financial affairs are relatively simple, then why not take advantage of the Will Aid scheme? This runs each November and for a small donation to charity you can get a solicitor to draw you up a will.

Finally, if you want discuss any of the above with like-minded Fools then pop into our Charitable Fools discussion board.