Giving to charity: How it can be tax-efficient too

Giving to charity may be part of your financial plan now or in the future. Donations can provide tax benefits too, potentially reducing the tax you pay and providing greater financial support to good causes.

2 min read

Supporting worthy causes is often something people want to include in their financial plan, whether through regular donations or a charitable legacy in their will. The good news is that to encourage charitable giving, there are tax breaks you can benefit from too.

If you’re thinking of supporting a charity, now could be a perfect time. The support given to the causes close to your heart could have a huge impact and it can benefit you too. There are three key ways that donating to charity can be tax-efficient.

1. Paying directly from your salary for tax relief

If you want to provide a regular donation to a charitable cause, giving directly from your salary or pension each month can be a hassle-free option. It can be advantageous in terms of tax too.

To be able to give directly from your salary or pension, your employer or pension provider must offer a Payroll Giving scheme.

If this is available to you, donations are given before tax is deducted from your income. The tax relief you get depends on the rate of tax you pay. To donate £1, you pay:

• 80p if you’re a basic rate taxpayer
• 60p if you’re a higher rate taxpayer
• 55p if you’re an additional rate taxpayer

The tax relief you get is different if you live in Scotland. To donate £1, you pay:

• 81p if you’re a starter rate taxpayer
• 80p if you’re a basic rate taxpayer
• 79p if you’re an intermediate rate taxpayer
• 59p if you’re a higher rate taxpayer
• 54p if you’re a top rate taxpayer

The tax relief can help your donations have a far bigger impact and can reduce the level of income tax payable.

2. Tax relief when donating assets

If you want to provide one-off or occasional support during your lifetime, you may choose to donate assets to a charity, including land, property, and shares.

This option can provide tax relief for both Income Tax and Capital Gains Tax.

You can pay less Income Tax by deducting the value of your donation from your total taxable income. You can do this by filling in a self-assessment tax return and including the donation in the ‘charitable giving’ section of the form.

Capital Gains Tax is paid on the profit you make when selling certain assets. However, you do not have to pay Capital Gains Tax on land, property or shares you give to charity. In some cases, a charity may ask that an asset is sold on their behalf. You can still claim tax relief on these donations, but you must keep records of the gift and the charity’s request.

3. Reducing Inheritance Tax

Depending on the value of your overall assets and your personal circumstances, your estate could be liable for Inheritance Tax when you pass away. That means leaving less behind for your loved ones, but a charitable legacy can do good and minimise the amount of tax due. There are two ways charitable legacies can reduce the amount of Inheritance Tax due:

First, any charitable legacy will be taken off the value of your estate before Inheritance Tax is calculated. As a result, it can help you keep your estate under the threshold limits for Inheritance Tax and means your estate won’t be liable for any at all.

Second, the standard rate of Inheritance Tax is 40%, which can significantly reduce what you leave behind. If you choose to leave 10% or more of your estate to charity, the rate of Inheritance Tax will fall to 36%. Depending on the size of your estate, this reduction can mean you leave more to loved ones while lending financial support to a charity too.

If you want to use a charitable legacy to reduce Inheritance Tax, this must be included in your Will. A charitable legacy can be a fixed amount, what’s left after other gifts have been given, an item or a percentage of your estate.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content of this article was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may impact on the accuracy of the article.

The Financial Conduct Authority does not regulate advice on taxation or Will writing.

The information in this article is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.