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As well as the basic routes for charitable giving of Gift Aid and Payroll Giving (see Charity Giving - Gift Aid), there are other ways of giving to charity which enable it to be as effective as possible, both for you and for the charity. “Effective” generally means saving tax and that’s what we will look at here.

Higher Rate Taxpayers and Gift Aid

Higher rate taxpayers can reclaim the difference between higher rate tax and basic rate tax on donations made via Gift Aid (see the Gift Aid article). In effect, your basic rate allowance is increased by the gross amount of the donation (the net amount of the gift plus basic rate tax reclaimed by the charity). This has a big advantage for those whose taxable income is in the range £100,000 to £114,950 because in this range your personal allowance is progressively withdrawn, so there is an effective tax rate of 60%. Giving to charity and thereby increasing your basic rate allowance means that less of your income (or possibly none) will fall into that band.

There is a similar effect for those with taxable income over £150,000 and subject to the top rate of 50% income tax. Reducing the taxable income to below that level is worthwhile.

Capital Gains Tax and Inheritance Tax Breaks

Secondly, gifts to charity are free of Capital Gains Tax (CGT). What that means is that any capital gain you have in an asset (such as shares) which would cost you 18% or 28% CGT if you were to sell it can be avoided completely if you donate the asset to a registered charity.

Another useful fact is that gifts to charity are free of Inheritance Tax (IHT). Whether you make the gift in your will, or whether it is before your death the value would not be added back into your estate in order to calculate IHT. (It would be in most circumstances if you made the gift to a non-charity within 7 years of your death.) The gift to charity also leaves the annual IHT gift allowance of £3,000 unaffected and available for other gifts.

Not only that, but gifts to charity on death after April 2012 will result in a reduction in IHT liability from the usual rate of 40% down to 36%, provided that at least 10% of the net estate goes to charity.

The third in the trio of our most common taxes is of course Income Tax. Quite apart from Gift Aid and Payroll Giving covered elsewhere, certain gifts to charity can get you Income Tax relief. They include shares, land, or buildings. In effect, you can deduct the value of the gift from your taxable income.

Company Donations

Companies which make gifts to charity can also save tax. The gift is made gross (before deduction of Corporation Tax), and the value may be deducted from profits when calculating the Corporation Tax liability.

Last reviewed 2nd December 2011