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Tax-efficient charitable giving

Tax relief on personal giving via Gift Aid is given partly by deducting basic rate tax from the payment and partly by giving relief under self-assessment. That makes it hard to work out the true cost of personal giving.

Assume that you want to give £100 out of your post-tax income to charity: in other words, to give £100 that you would otherwise have been able to spend on wine, women, song etc.

If you’re a basic rate taxpayer, it’s straightforward. You give the charity £100. If the donation is made under Gift Aid, the charity will get an extra £25 at no cost to you.

If you’re a higher-rate taxpayer, it’s a bit more complicated. Giving the charity £100 under Gift Aid will deplete your post-tax income by just £75. If, like your basic-rate friend, you’re prepared to sacrifice £100 of post-tax income, make your donation £133. And if you are an additional-rate taxpayer, liable at 45%, you can donate a bit over £145. In each case, by increasing the donation, you are keeping your post-tax cost constant and effectively giving the charity the full benefit of all the tax relief you get on the donation.

Alternatively, if you operate your business through a company, there’s a simpler solution: have your company make the donation.

  • No need to bother with a Gift Aid declaration;
  • No deduction of tax at source;
  • Avoid the additional tax or National Insurance Contribution cost of extracting money from the company to make the donation personally;
  • No need, when preparing your personal tax return, to scrabble around to find what Gift Aid donations you’ve made in the year.

Just make the payment, record it and vouch it in the company’s books and take a deduction for it against the company’s taxable profits.

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