If you are planning to give to charity over the festive season, make sure you do so in the most tax-efficient manner. Two-thirds of us still don’t even think about tax when we give, but with a range of methods available, there’s no excuse not to maximise charitable donations: the more the charity gets and the less the taxman takes in the process, the better, surely?
Last year, says the FT, the Government handed back £512m to charities, £240m to higher-rate taxpayers and gave £25m of relief on payroll giving, thanks to people using tax-efficient ways to give. But a great deal more could be done. The Charities Aid Foundation estimates that if half the £5bn currently given by UK taxpayers was done in a tax-efficient way, the charitable sector would net an extra £500m in tax relief.
So here’s what you need to know about the most tax-efficient ways to give to charity.
Sign up for Gift Aid
This is the most popular, and simple, way to boost donations by allowing charities to claim back 28p for every £1 given. Donors simply complete a declaration to their chosen charity (either in writing, over the phone or online) with their name, address and taxpayer status. The declaration then applies to any past or future donations to that charity. Gift Aid is “good for donors too”, says Esther Shaw in the Sunday Express. If the donor is a higher-rate taxpayer, they can claim 18% tax relief on donations in their tax return for the previous year, rather than for the one in which the donation was made. For Gift Aid details, see www.justgiving.com.
Give via your payroll
This method is “more tax-efficient” than most, says Sarah Ross in the FT, and it’s also relatively painless. Employees ‘give as they earn’ (GAYE), so the donation to their chosen charity is made from their salary before tax is paid. Thus a monthly donation of £20 will cost a higher-rate taxpayer only £12, and a basic-rate taxpayer £15.60. Nearly two-thirds of Britain’s largest companies operate such schemes and £85m was raised this way last year, with some employers even going so far as to match the donations that had been made by their staff.
Give shares
Donors can give shares, unit trust holdings, Oeics (open-ended investment companies), and even land to charities tax-free with the added advantage of offsetting their donation against their income-tax bill.
For example, if someone earning £50,000 donates £10,000 in listed shares to charity, they only have to pay income tax on the remaining £40,000. Giving sharescan be an effective way to write off losses, says Emma Simon in The Daily Telegraph. “If your shares have bombed and you are selling at a loss, at least by giving them to charity you can reduce an income-tax bill.” Shares can also be given via the ShareGift scheme, which pools donated shares, sells them and divides the proceeds between 700 charities. This is particularly useful for people who have received a small number of shares through an inheritance, or have an odd number of shares that would be too costly to sell as they are.
Open a charity account
The Charities Aid Foundation offers an account with a chequebook and CharityCard that enables the account holder to distribute sums to any recognised charity. The CAF reclaims tax at the basic rate on any donation and adds it to the account balance, thus dealing with all the tax reclaims and administration. Stocks and shares can also be gifted to the account.
Leave a legacy
Giving to charity is another way to ensure that someone other than the taxman gets their hands on your estate. Charitable donations in a will are free of inheritance tax and account for almost a third of the income of Britain’s largest charities. Donors can request, for example, that everything above their inheritance tax threshold (currently £263,000) should be given to the charity or charities of their choice. That would mean that their heirs would pay no inheritance tax at all (on the downside, however, they would only inherit £263,000). The Remember a Charity scheme represents nearly 130 charities and offers free advice on how to draft a will to include any charitable donations.
Pass on your tax rebate
Since September this year, you have been able simply to tick the box on your tax return and all, or part, of any tax rebate can be given straight to the charity of your choice. Most of the main charities have signed up to this scheme. Any rebate you might get as a result of GiftAid (see above) can also be passed on this way.