How to give to charity easily and tax-efficiently

As Christmas rolls around once again, it’s that time of year when we all start thinking about giving to others less fortunate than ourselves. Giving to charity has evolved from the days of dropping spare pennies into a charity box or bundling £5 notes into an envelope through the door though – there are now myriad ways to give tax-efficiently and it doesn’t involve emptying your purse at the shop counter.

Pennies, the electronic charity box, is one such revolution. Pennies admits that the days of throwing spare change into a box at the till are long gone. And so Pennies has come up with the technology to allow shop customers to round up their purchases to the nearest pound, with the surplus going to charity. In November, it reached its one millionth donation in just a year, raising £250,000 from the public’s ‘spare change’ to give to more than 20 UK charities.

Gifting tax-efficiently

Giving to charity tax-efficiently is far easier than you might think. There’s no struggling over a tax return, and it means more money is given to charitable causes rather than ending up in the taxman’s pocket.

If you’re a taxpayer, you can reclaim the tax you’ve paid on a donation from HMRC through Gift Aid. Since the scheme was introduced in 2000, it is estimated that it has given nearly £1 billion to UK charities. Gift Aid applies to donations from individuals who pay UK tax, and it adds basic-rate tax relief at 20 per cent to all charitable gifts. In essence, this allows your chosen charity to claim an additional 25 pence for every pound you donate as your contribution is deemed to have come from taxed income. Based on a basic-rate taxpayer, a donation of £100 would mean £125 goes to the charity. Higher-rate taxpayers can also give tax-efficiently, as they can claim back the difference between the higher rate of tax (either 40 or 50 per cent) and basic rate tax at 20 per cent. So, a higher-rate taxpayer can currently claim back an extra 20 per cent of their donation through a tax rebate and an additional-rate taxpayer at 50 per cent can claim back 30 per cent. It’s also possible to backtrack Gift Aid payments from previous tax years, but you’ll need to let HMRC know.

‘It is important to make sure you have paid enough tax to benefit from these amounts and that you keep good records,’ says Martin Bamford, managing director at IFA Informed Choice. ‘If you don’t complete a self-assessment tax return each year, you can complete HMRC form P810 Tax Review instead. Alternatively, you can call your tax office and ask them to adjust your tax code.’

Patrick Connolly, chartered financial planner at AWD Chase de Vere, points out that it’s worth remembering that donations can also impact on those who claim the age-related personal allowance, married couple’s allowance or tax credits.

‘If you are aged over 65 and your income is less than £24,000, you are entitled to a higher personal income tax allowance. However, over £24,000 for each additional £2 you earn your allowance is reduced by £1 until it reaches the same level as the basic income tax allowance. Donations made to charities through Gift Aid are deducted from your income for this purpose and so can help you retain part or all of the extra allowance,’ he says. Check your situation with HMRC first.

Gifting shares

Gifting shares is a slightly more complicated beast. Any gains made from holding shares are usually liable for capital gains tax, if the gains total more than the annual exemption limit of £10,600. However, this doesn’t apply when gifting shares to your spouse, civil partner or to a charity.

Individuals with small, unwanted shares can also give these to charity, as it’s often too expensive to sell just a couple of shares because of the costs involved. Sharegift.org.uk aggregates individual shares and sells them as one large holding and then donates the proceeds to a range of UK charities. You don’t need to have a share certificate (although it will make filling in the donation coupon easier), and the scheme can accept foreign shares and shares in nominee accounts as well. Since its launch in 1996, Sharegift.org.uk has given over £14 million to more than 1,700 charities.

Giving to charity via payroll

Charity donations can also be made directly through your salary, or through a company or personal pension. It allows immediate relief from income tax on any payments you make, as the donation is given before any tax is taken off. Individuals can give to as many charities as they want, and can cancel the agreement at any time. Not every employer or pension provider will offer payroll giving, so check with them first. ‘This is as tax-efficient as Gift Aid, but unfortunately does not reduce the amount of National Insurance contributions paid, but it can be easier to administer for employees,’ adds Bamford.

Leaving money to charity in a will

There is no inheritance tax (IHT) charged on money or assets left to charity in a will. So leaving your assets to a charity can save your loved ones from being burdened with a 40 per cent IHT bill.

Furthermore, in the March 2010 Budget, Chancellor George Osborne announced that individuals wishing to leave 10 per cent or more to charity will benefit from a lower inheritance tax (IHT) bill, in an attempt to make giving part of your legacy to charity ‘the new norm’. Usually, IHT at 40 per cent is charged on any amount over the nil-rate band of £325,000, but by leaving some of your estate to charity the rate decreases to 36 per cent. The tax change is expected to benefit charities to the tune of around £300 million each year. It’s also worth remembering that gifts made seven years before death are exempt from IHT.

‘Most people give relatively small sums to charity and this is often done through Gift Aid, their payroll or through their will, with the main aim being that the charity benefits and with little thought of possible tax savings for themselves,’ says Connolly.

The art of philanthropy

Significant donations to charity can usually be arranged through a bank, or through special organisations. Private bank Coutts, for example, can set up charitable foundations or donor-advised funds for its clients.

Coutts has also set up a ‘knowledge centre’ to advise on philanthropy, to meet growing customer demand for giving funds to charity. The online platform includes forums, discussions, articles and one-to-one advice from customers on how best to give money to charity. ‘It includes five areas of advice: why do people do philanthropy? what can you achieve? how can you give philanthropically? how can you measure the result? and what will the future of your gift be?,’ says Jason Jarvis, head of the Knowledge Centre. It also aims to teach about social enterprise and social investment as well as philanthropy.

‘For those making significant donations it is important to understand the tax considerations and benefits of the different approaches, either to reduce their own tax liability or to be able to give additional amounts to the charity,’ says Connolly.

Bamford concludes: ‘Leaving aside the tax efficiencies involved, it is important to donate to charities in which you believe and understand where the money is going. Some charities spend more on administrative costs than others, so check this amount and pick a charity where your donation will have the biggest impact.'

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