According to a study from Nationwide, 6 in 10 Brits have cut down on charitable giving during the cost of living crisis. The findings show that donations have dropped by an average of £13 a month as people try to cut back and protect their wealth against rising living costs.
But, while it can be useful to cut back on non-essential costs, it may be beneficial to continue supporting good causes.
That’s because, when used in the right way, charitable donations can potentially make your wealth more tax-efficient. So, you may be able to support causes that are important to you and mitigate a big tax bill at the same time.
Here are three ways to use charitable giving to your advantage.
1. Use Gift Aid to claim Income Tax relief
Gift Aid is a tax incentive designed to encourage charitable giving by boosting donations. The scheme allows charities and community amateur sports clubs (CASCs) to claim the basic-rate tax paid on any donations they receive. For example, if you donate £1,000, the charity receives £1,250.
This is beneficial for organisations you give to and, if you are a higher- or additional-rate taxpayer, you may also be able to use Gift Aid donations to reduce your Income Tax bill.
That’s because you can claim the difference between basic-rate relief and your marginal tax rate as additional tax relief. For example, if you pay higher-rate tax at 40%, you can normally claim a further 20% Income Tax relief when donating through Gift Aid.
Additionally, if you earn £100,000 or more, you may be able to restore some of your lost Personal Allowance by donating through Gift Aid.
In the 2023/2024 tax year, you can earn £12,570 before Income Tax is due. However, your Personal Allowance will likely reduce if your adjusted net income – your total taxable income minus any pension contributions – exceeds £100,000.
Normally, you lose £1 of your Personal Allowance for every £2 that your adjusted net income exceeds the threshold. But you can extend this £100,000 threshold by £1 for every £2 worth of Gift Aid donations.
That’s why donating through Gift Aid may allow you to keep more of your Personal Allowance and claim tax relief, potentially reducing your Income Tax bill.
2. Donate through a payroll giving scheme to reduce Income Tax
A payroll giving scheme allows you to give charitable donations directly from your income. If your employer runs a scheme of this kind, you can request that they deduct donations before paying you.
This makes it easier to maintain regular contributions and you may benefit from Income Tax relief at your marginal rate on these donations.
So, you may want to ask your employer about payroll giving and how you can potentially use it to reduce your Income Tax bill.
3. Use gifts in your will to mitigate IHT
Inheritance Tax (IHT) may be a key concern for you as you no doubt want to leave as much of your estate as possible to your family when you are gone. The good news is, leaving a gift to charity in your will may reduce the IHT that your beneficiaries pay.
That’s because your family will usually pay IHT on any assets that exceed the “nil-rate band” – £325,000 in 2023/2024.
You may also benefit from the “residence nil-rate band” of £175,000, meaning that you can potentially pass on £500,000 without IHT. Anything above this threshold will likely be taxed at 40%.
However, charitable donations are usually free from IHT and you can essentially use them to reduce the overall value of your estate by leaving money to charity in your will. If you can bring the value below the nil-rate bands, your family may not have to pay at all.
Additionally, if you gift 10% of the net value of your estate – the value of your assets minus debts and funeral expenses, and your nil-rate bands – the rate at which your beneficiaries pay IHT drops from 40% to 36%.
That’s why you may want to consider updating your will so you can leave a sizeable donation to a cause close to your heart, while also potentially reducing the IHT that your beneficiaries pay on your estate.
Get in touch
If you want to learn more about the potential tax benefits of supporting good causes, we can advise you.
Please get in touch and find out how our team of VouchedFor top-rated planners could help you make your wealth more tax-efficient.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.