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Unlock charitable power and tax breaks

Date: 08 July 2024

3 minute read

With inflation significantly impacting the country – so much so that the UK slumped into a technical recession at the end of last year – charity donations are dwindling. For charities, donations that they do receive are crucial, empowering them to contribute to the betterment of society.

This underscores the importance of ensuring your donations are optimised to deliver the greatest impact possible, both for you and the charity. Unfortunately, on most occasions the potential tax benefits of these contributions are not being fully utilised. Charities Aid Foundation (CAF) research indicates that just 55% of donors claimed Gift Aid on their charitable contributions. As a result, charities lose out on up to £560m every year in unclaimed Gift Aid; a considerable amount of money that could support vital programmes.

Higher or additional-rate taxpayers may be able to increase the impact their donations have on their own wealth via tax relief. Gaining a solid understanding into the financial workings of philanthropy can help one approach charity with greater strategy and efficiency.

Tax-efficient strategies for business owners

Business owners possess greater flexibility to optimise tax advantages on philanthropic contributions. Owners can reduce their corporate tax burden by making gifts through their companies, which increases the tax efficiency of each donation.

Most business owners use a combination of larger dividends and a low wage to compensate themselves. Direct business gifting enables a decrease in taxable profits, which lowers corporation tax. This offers limited business owners a special opportunity to maximise their tax status while making charitable contributions.

A £1,000 donation made through a company, may result in a 19% to 25% corporation tax reduction, saving you between £190 and £250.

A donation of £1,333.33 may only cost £1,000; a strong motivator for business owners to practise strategic giving.

Funds advised by donors: filling the void

Donor advised funds or DAFs offer an effective and organised method of directing donations while preserving tax benefits.

With a Deferred Annuity Fund (DAF), an individual can make a one-time tax deduction, contribute to the fund, and then suggest contributions to charitable organisations over time. Those who wish to maximise the tax efficiency of their contributions while simultaneously supporting issues in their own countries may find this technique especially advantageous.

Boosting your donations with gift aid and tax relief

With Gift Aid, charities recover income tax on contributions made by UK taxpayers. A donation of £100 entitles the charity to an extra £25 through Gift Aid; the amount of basic rate tax the donor paid. Further benefits accrue to higher-rate taxpayers. A higher-rate taxpayer can drastically lower their tax bill by receiving relief for the dona­tion on their tax return.

For instance, a £1m donation only needs £800,000 from the giver when Gift Aid is added. The final cost can be as low as £550,000 for an additional rate taxpayer, as Gift Aid amplifies the impact of their dona­tion to a greater extent.

Gaining a solid understanding into the financial workings of philanthropy can help one approach charity with greater strategy and efficiency.

Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited 17/5/2024

Tax treatment varies according to individual circumstances and is subject to change.

The value of pensions & investments and the income they produce can fall as well as rise. You may get back less than you invested. You should only consider these products if you are willing to take some risk with your capital. We will consider whether such products are suitable for you before recommending an investment.

For ISA’s Investors do not pay any personal tax on income or gains but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA manager.

All references to clients’ examples in this article are fictitious.


Darren Service (DipPFS)

Financial Planner

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