We all know the primary benefit of giving money to a charity is to benefit whichever worthwhile cause you have chosen. In the our globally connected world we see the amazing work that a number of charities do every day to make a difference to people’s lives, to animals or to the environment.
Successive governments have recognised the huge role that philanthropy plays in funding such causes and there are a number of tax incentives designed to give people more than just warm feeling that comes from being able help others.
We have highlighted below three of the ways that you can supercharge your charitable gifting and also receive a personal tax breaks in the process.
Reduce your Income Tax Bill using Gift Aid
You have probably ticked the gift aid box when giving to charity in the past, but what does it really mean? If you are a higher rate taxpayer you can claim tax relief of up to 20% on charitable donations made using Gift Aid, additional rate taxpayers can reclaim up to 25%.
Higher rate taxpayers pay 40% income tax and for additional rate taxpayers it’s 45%. Gift Aid allows the charity to reclaim the basic rate tax (20%), the other 20% or 25% can be reclaimed by the individual to reduce their tax bill for that year. Claims will typically be for the tax year of the donation, but if you did not earn sufficient to benefit from the relief in the current tax year it is possible to reclaim income tax from the previous tax year.
Its probably a good idea to show how this works with an example;
- Boris is a higher rate tax payer and donates £1,000 to charity, using Gift Aid.
- The charity will reclaim the basic rate tax of 20% directly from HMRC, effectively giving the charity an extra 25p for every £1 that you donate. In this example Boris donated £1,000 and the charity also receives £250 tax relief, a total of £1,250. Happy days.
- Boris can then reclaim the other 20% that makes up the full 40% he is subject to on his income.
- This means Boris will also receive £250 in tax relief from HMRC.
- End result – the charity has received £1,250 and it only cost Boris £750.
- If Boris was an additional rate taxpayer paying 45% tax, he could reclaim 25%. The same £1,250 received by the charity would have cost Boris £687.
Remember – To receive the additional relief a Gift Aid declaration needs to be completed. It must be a recognised charity and you cannot use gift aid if you have not paid income tax at least equal to the amount that will be reclaimed.
Made a Gift in the Last 4 Years but Forgot to Claim?
Don’t worry, you can in most cases still claim tax relief for gifts that were made using Gift Aid up to four tax years after the donation was made. Speak to your accountant if you think you might have unclaimed donations.
Reduce your Inheritance Tax Bill
Full disclosure: this won’t necessarily benefit your beneficiaries. But stick with us on this one.
Inheritance Tax (IHT) is payable at a rate of 40% on assets left to beneficiaries over certain limits. This was up to £650,000 for a long time, but could be up to £1,000,000 from 6 April 2020 (hyperlink to IHT article).
Any money that you leave to a registered charity in your will is not subject to Inheritance Tax. For example, for a client with an estate subject to IHT, leaving £10,000 to charity there will be no IHT payable on the bequest and the charity will receive £10,000. The same amount left to a beneficiary would be subject to IHT and they will only receive £6,000. For a number of clients, where they feel their beneficiaries are already receiving a sizeable inheritance, they would rather see less of their hard earned assets end up in the treasury’s coffers to benefit a charity that they are close to.
Where you are prepared to leave at least 10% of your total net estate to charity, the overall rate of Inheritance Tax payable on the rest of your estate will reduce to 36%. Whist this does not increase the amount your beneficiaries will receive, you can leave more to charity and less to HMRC.
Here’s an example,
Theresa has just died, she never married and did not own her own home. She has one child Jeremy who she has left everything to:
- Theresa’s estate is worth £425,000
- In her will, she left it all to her son Jeremy
- She has her full IHT Nil Rate Band allowance (currently £325,000 for the 2019/20 tax year)
- Theresa’s ‘net estate’ is £100,000 (i.e. £425,000 minus £325,000). And there is Inheritance Tax to pay on £100,000 at a rate of 40%
- Her estate will pay a tax bill of £40,000 (i.e. 40% of £100,000).
- Jeremy will receive £385,000 after IHT.
If Theresa had left £10,000 (i.e. 10% of her £100,000 net estate) the position would be as follows:
- In her will Theresa leaves £415,000 to Jeremy, and
- £10,000 to charity (which is 10% of her ‘net estate’ of £100,000)
- Her estate would then pay 36% on £90,000 worth of assets instead. The total IHT paid by Theresa’s estate is now £32,400 in Inheritance Tax.
- Jeremy will receive £382,600, which is £2,400 less than if she did nothing.
- However, the charity has received £10,000.
- Theresa has effectively been able to leave £10,000 to charity at a cost of only £2,400 to Jeremy’s inheritance.
Top Tip – if you already intend to leave between 4 and 10% of your taxable estate to charity you can increase the amount left to charity to 10% without reducing the amount your beneficiaries receive. The cost of the extra charitable gift is met by the tax saving resulting from the reduction in the IHT rate from 40% to 36%.
Regain a Lost Personal Allowance
Many people are now familiar with the fact that for individuals with ‘adjusted net income’ of over £100,000, they will lose £1 of their personal allowance for every £2 of ‘adjusted net income’ over £100,000. This means that, for the 2019/20 tax year someone with income of £125,000 or over will lose all of their personal allowance. This creates an effective tax rate of 60% on income falling within the £100,000 to £125,000 band.
Importantly, ‘adjusted net income’ is made up of your taxable income after certain reliefs, such as personal pension contributions or gross gift aid payments. This means there is an opportunity to use a gift aid payment to regain the personal allowance and generate tax relief at 60%. See the two examples* below with and without any gift aid contributions.
£125,000 Gross Income – No Gift Aid
|Income Band||Income Tax (%)||Income Tax (£)|
|£0 – £37,500||20%||£7,500|
|£37,501 – £125,000||40%||£35,000|
Net income received: £82,500 (£125,000 gross income less £42,500 income tax)
£125,000 Gross Income, then £20,000 Gift Aid Donation
Adjusted net income is the income less the grossed up Gift Aid Donation (£125,000 less £25,000 = £100,000), so full personal allowance regained
|Income Band||Income Tax (%)||Income Tax (£)|
|£0 – £12,500||0%||Nil|
|£12,501 – £75,000**||20%||£12,500|
|£75,501 – £125,000||40%||£20,000|
**Basic Rate Band is extended by the gross charitable gift
Net income received: £72,500 (£125,000 gross income less £32,500 income tax less £20,000 charitable donation)
Amount received by charity: £25,000
This is a very effective way of maximising tax relief. In this scenario you have been able to make a £25,000 gift to charity at a cost of £10,000 gaining 60% tax relief on the gift. The same principal applies to personal pension contributions, in the same scenario if you had put £20,000 spare net income into a personal pension you would have received £25,000 into your pension at a cost of £10,000 to you.
Ready to take advantage?
If you are ready to take advantage of the tax breaks noted above, we can help! Montage are proud to support Havens Hospices and the team are all taking part in this year’s Rough Runner obstacle course for Haven’s Hospice. The course is 5km long with 10 gruelling obstacles along the run. Chris has gone one step further and has also volunteered to do the Chelmsford Marathon, as if just one challenge wasn’t enough for him! Click here to give your support and potentially save yourself some tax in the process. Supporting a great cause AND morally acceptable tax reduction… what’s not to like!
*The examples above do not include National Insurance.
This blog represents our understanding of current law and HMRC practice which may be subject to change in the future. This blog is for general information purposes only and does not constitute advice. You should seek professional advice before taking or refraining from taking action on the basis of the contents of this publication. Whilst we believe the information within this guide to be correct we cannot assume any liability for any errors or omissions.