Tax Relief and Benefits When Donating to Charities

Giving time, money or other assets to charity is always noble, but in the U.K. especially, charitable contributions can come with significant tax benefits.

For donors, that means it’s important to be aware of your options and what to look for in a nonprofit. For volunteering organisations, embedding this information into your campaign material and educating your community can lead to more donations and higher engagement.

Read on to learn all about the ins and outs of tax benefits attached to donations.

What is a charitable donation?

Any sort of contribution to a charitable organisation extends far beyond tax benefits and acts of kindness. Think of them as lifelines for nonprofits and catalysts for the change that many communities and causes fight for.

While the idea of giving is simple, donations can come in countless forms, from monetary gifts to tangible goods to volunteering time or expertise. Apart from what counts as a donation for nonprofits, the legal framework is also important, and that changes slightly for every country.

In the U.K., charitable donations are governed by the Charity Commission for England and Wales. Charitable donations can be made to registered charities or those recognised as charitable organisations by law. Individuals can donate to charities or to community amateur sports clubs (CASCs) in one of four ways:

• Gift Aid donation
• Payroll giving initiative
• Land, property or shares donations
• Donations made in your will

You can’t always deduct expenses related to volunteering, although your nonprofit may cover certain expenses. By channelling resources toward these noble pursuits, donations empower nonprofits to amplify their impact, creating ripples of positive change that touch lives and communities worldwide.

Understanding Gift Aid: Maximising the impact of your donation

Gift Aid is a tax relief initiative in the U.K. that allows your charity or CASC to claim an additional 25p for every £1 donated by a U.K. taxpayer. The donor doesn’t need to pay anything extra, provided they have paid an equal amount or more in income or capital gains tax within that year. However, that rule only applies to the basic rate tax of 20%. Anyone paying higher tax rates can claim the difference between those 20% and their actual rate, which might incentivise them to donate to your cause. That said, it’s important to keep in mind local differences in taxation that may affect a donor’s situation, e.g. the marriage allowance rule in Scotland.

CASCs and charities have similar regulations for Gift Aid, but CASCs cannot receive tax relief for membership subscriptions.

To ensure your nonprofit is claiming Gift Aid correctly, you need to have a few processes in place. First, you must be registered with HM Revenue & Customs, which also means you have to meet certain reporting and eligibility criteria. On the other end, the donors must give your nonprofit permission to claim the tax relief through a Gift Aid declaration.

Even if some requirements are attached, this makes Gift Aid an attractive solution for nonprofits and donors, combining tax benefits with higher donations.

Benefits when donating to charities: Unveiling tax relief opportunities

Both individuals and corporations can realise tax benefits when donating to charities, and judging by £6.0 billion in the tax year to April 2023, they’re well established at this point. Still, those benefits can vary depending on donation type and a donor’s location. Educating donors about those opportunities can position your organisation as trustworthy while incentivising donors to consider your cause for their next donation.

Here are the cliff notes you can keep handy to inform potential donors:

Tax benefit opportunities for individuals

Besides the Gift Aid initiative, you have a couple of other options at your disposal to donate to nonprofits, the first one being payroll giving. All you need is an employer who deducts tax through the Pay As You Earn system and operates a payroll-giving initiative. While tax benefits under Gift Aid are already generous, they’re capped at 25%.

That means, for donors paying higher income tax rates, payroll giving may be a more attractive option because they can save even more money. Also, since donations are deducted from the donor’s gross pay, the tax relief takes less bureaucratic effort and time.

Tax benefit opportunities for corporations

As long as donations aren’t tied to any conditions, they can help an enterprise on corporate tax. The government has implemented a range of rules excluding donations from tax exemptions, like loans, dividends or monetary thresholds for benefits expected in return for a donation.

Despite the numerous advantages of setting up a corporate volunteering program, the actual tax benefits are limited to the costs deductible as business expenses.

Ways to make a charitable donation beyond a cash contribution

Donors can also lower their tax burden by donating approved stock shares, real estate, and assets or leaving them to charity in their will.

This might be an option to consider if someone inherits a small amount of stocks or other assets. Naturally, donating something that can fluctuate in market value is a bit more complex than wiring a fixed amount every month. Therefore, you need to complete a post-transaction valuation check form to confirm which dates and amounts apply to your donation.

As a nonprofit organisation, you should publicly share which types of non-cash donations you accept. Some charities even choose to share their preferred brokerage or ask donors to sell their shares before donating.

For the donors, all of these options come down to income or capital gains tax relief, even though they tend to require more thorough documentation due to the complex nature of the involved assets.

How much do charities actually receive from donations?

It’s difficult to give a general answer as to how much of your donation reaches the respective nonprofit organisation. What we can do is give you a sense based on the factors going into the equation.

First of all, all registered charities are obliged to report on their impact, and some even go beyond those duties by making more regular impact reporting part of their service to their communities. According to the UK Civil Society Almanac 2023, expenditures for charitable activities made for 69% of all voluntary sector spending, followed by grants and fundraising.

As a donor, you should be wary of generic causes and take notice of collectors’ identification and licence and track down those who demonstrate a healthy level of transparency around funds, activities and diversity.

If a nonprofit is already using a tool like Rosterfy, they’ll have deeper insights into their most current numbers, which means they can share them with you as a donor or potential volunteer on a more consistent basis.

Do you have to declare charitable donations on self-assessment?

As a rule, you don’t have to report your charitable donations, and even your employer doesn’t need to know about the nonprofits you’ve chosen, should you decide on payroll giving. But that only covers the actual donation, not the tax relief.

Once you intend to claim tax benefits on your donation, you’re usually required to keep some sort of record of your donation, whether that’s to benefit from a higher personal allowance, a married couple’s allowance or the difference between basic and higher tax rates.