04/02/2025
Charitable donations
Gifts made to charity can lead to savings of income tax and inheritance tax for the donor. The tax impact of donations may be summarised below.
Income tax savings
When an individual claims gifts on a donation it allows the charity to reclaim an additional 25%, which is known as the ‘gross equivalent’ of the donation. For instance, suppose an individual made a gift of £800, the charity is able to claim an additional 25% of that donation, which gives a total donation of £1,000.
The individual who made this donation will see their basic rate tax band extend by another £1,000. Therefore, if they are a higher rate taxpayer, making the gift aid claim will result in a tax saving of £200 (£1,000 x (40%-20%)).
As well as increasing the basic rate tax band of an individual, the gross value of gift donations also impacts the following:
- The child benefit repayment threshold is increased by the gross value of the donation made.
- An individual’s tax-free personal allowance begins to be reduced when their total income exceeds £100,000. This £100,000 threshold is increased by the value of the gross value of any donation.
Gift aid donations are usually claimed through self-assessment and an individual can in some circumstances treat the donation as being made in the previous tax year.
Please be aware, if you are claiming gift aid on your donations, you need to ensure you have paid a sufficient amount of tax that is at least equal to the tax reclaimed by the charity. Otherwise, you as the donor will be liable to pay the income tax that has been claimed back by the charity.
Inheritance Tax Savings
Gifts made to charities can be fully exempt from inheritance tax irrespective of whether the gift is made during your lifetime or is made in your will.
In 2024, over 400 estates donated at least £1 million to charities, contributing to a record-breaking total.
Gifts exceeding £1m rose by 33% from the previous year, increasing £850m in 2023 to £1.1bn. These high-value donations accounted for 54% of the £2.1bn gifted to charities through wills in 2024.
Those who donate more than 10% of an estate to charity benefit from a reduced IHT rate of 36%, compared to the standard 40%.
If you wish to know more about how charitable donations can impact your tax position, please get in contact with Joe Wilson on 023 8046 1237 or by emailing Joe Wilson.