In the second part of our brand new series ’52 Ways to Save Tax’ we look at a way that you can cut your tax bill and do something positive in the process. Keep reading to find out how making a gift to charity can reduce your tax bill – particularly if you are a higher or additional rate taxpayer.
52 Ways To Save Tax – Part 2: Giving to charity
If you are a UK taxpayer and you make a donation to a charity then there are tax advantages.
The Gift Aid scheme is for gifts of money by individuals who pay UK tax. When you make a donation through Gift Aid, the charity takes your donation – which is money you’ve already paid tax on – and reclaims the basic rate tax from HM Revenue & Customs (HMRC) on its ‘gross’ equivalent – the amount before basic rate tax was deducted.
The basic rate tax is 20 per cent. This means that if you give £100 using Gift Aid, it’s worth £125 to the charity.
Tax advantages to higher rate taxpayers
If you pay higher rate tax, you can claim the difference between the highest rate of tax that you pay and the basic rate of tax on the total ‘gross’ donation you make to a charity.
For example, if you donate £100 to a charity, under Gift Aid the total value of your donation to the charity is £125. This means that you can claim back:
£25 – if you pay tax at 40 per cent (£125 × 20%)
£31.25 – if you pay tax at 45 per cent (£125 × 20%) plus (£125 × 5%)
You make this claim on your Self Assessment tax return.
It is also possible for you to elect for a donation to be treated as if it had been made in the previous tax year. For example, if you were a higher-rate taxpayer last year but not this year, it would be advantageous to have a donation treated as if it had been paid in the previous year.
Leaving gift to a charity in your will
If you leave a gift to a charity in your will, its value will not be included when valuing your estate (your money, possessions and property) for Inheritance Tax purposes.
This means that you can reduce the value of your estate – and therefore the amount of Inheritance Tax that may be due – by leaving a gift to a charity in your will.
For example, if the value of an estate on death was £425,000 the amount of Inheritance Tax that would normally be due (tax year 2014/15) would be £40,000 (40 per cent of the sum over the threshold of £325,000).
If you had chosen to leave £10,000 to a charity in your will, the value of the estate would reduce to £415,000, reducing the Inheritance Tax bill to £36,000. You would save £4,000 in tax.