Cut your tax bill with charitable giving
Alistair Darling’s 2008 Budget gave a boost to charities following fears the introduction of a lower income tax rate this April would cost them £90 million a year.
The rate of income tax was cut from 22% to 20% on 5 April 2008. While this was good news for workers, the subsequent cloud for charities was that the amount they could reclaim in gift aid would dip from £1.28 to £1.25 for every £1 donated.
However, Darling responded to concerns in his 2008 Budget by pledging to introduce an exemption for charities that allows them to continue to claim gift aid at 22% for the next three years.
John Low, chief executive officer of the Charities Aid Foundation (CAF), said; “It is a huge relief as we feared charities were going to lose in excess of £90 million per year when the basic rate of tax comes down in April. This will give charities a chance to adjust to the new lower rate.
“Gift Aid is a generous tax relief. This announcement means that every pound given by a UK taxpayer will continue to be worth £1.28 for their charity.”
The boost to charities will only be translated into extra money if taxpayers donate in a tax-efficient way. While cash-donation boxes remain a common sight in shops and along the high street, this is not the most tax-efficient way to give to charity.
Gift Aid is a tax-relief on donations, meaning the government treats the money as if the donor had already deducted basic rate tax from them. The charity can then reclaim this tax to increase the value of a donation.
If you are a basic rate taxpayer donating through Gift Aid then every £10 you donate will mean £12.80 for the charity. That’s an extra £28 for every £100 you donate.
And if you are a higher rate taxpayer who uses Gift Aid to donate to charities then you can claim higher rate relief on these payments. All you need to do is enter the donations in the gift aid box on your self-assessment return or declare donations on your P810.
When you arrange to give money to a charity – as part of a regular donation or simply a one-off - you are required to give them permission to claim Gift Aid on your donation. This can be done over the phone, but normally the charity will ask you to ‘opt in’ on a form.
Give As You Earn
You can also claim tax relief on donation given via a Give As You Earn scheme. However, you cannot use this form of tax-efficient donation as well as Gift Aid on your donation.
With Give As You Earn your donation is taken directly from your pre-tax salary so the tax is passed on to the charity rather than the taxman.
This type of donation means the money you give goes further for the charity. For example, a £6.41 donation will only cost you £5.
There are four different ways to donate to charity using the Give As You Earn scheme.
- If you employer has a Give As You Earn scheme then all you need to do is inform your payroll department that you want to participate. They will need to know how much you want to donate each month and which charity or charities you wish to give to.
- If your employer doesn’t run a Give As You Earn scheme, then you could set up a CAF charity account. This enables you to pay a set amount of money (the minimum is £10 a month) into a special account. You can then send a chequebook to donate money tax-free to any charity you want.
- If you and your colleagues want to fundraise as a group then you could set up a staff charity fund to pool your pre-tax donations.
- Finally, if you want to donate at least £10,000 a year to a charity then you could set up a CAF trust. You money is invested and any income generated is donated to the charity of your choice. As with other Give As You Earn schemes, the money is taken from your salary pre-tax so your £10,000 will actually only cost you £6,000.
Donating assets to charity
If you are a UK taxpayer, then you can claim tax relief on charitable gifts of quoted shares, land, property or other personal assets including art works. You will not have to pay capital gains tax on the value of your donation, and may be able to claim back costs such as stamp duty.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.