How Best To Give To Charity

A puppy is not just for Christmas, they used to say and the same is true for gifting to charity - it is something that is, if you are able and it is within your means, good to do year round.

Christmas is a time for giving and not just to our friends and family - it is also an important time for charities to receive donations.

But according to the Charities Aid Foundation, giving in the UK has declined over the past decade and we recently dropped out of the top 20 nations when it comes to giving money, time or helping strangers.  Less than 30 per cent of us give regularly out of our income and the young are less likely to give than the old.

So how do we give most effectively?

Q: I’ve heard of the Gift Aid scheme – how does that work?

A: Gift aid is a scheme that enables charities- but not just them -  organisations called community amateur sports clubs (CASCs) - to claim back the tax you paid on any money you give to them.

This means that the organisation won’t just get your donation, they will also get a top-up from the government. But it is actually slightly better than it sounds even.

This can confuse people as for every £1 you donate; the charity actually receives £1.25 – which is more than the basic income tax rate. Whilst the basic income tax rate is 20%, this is calculated on your gross donation (the amount of money you donate before any tax has been deducted). So, if you donated £10, this would actually equate to £12.50 because 20% of £12.50 is £2.50. The charity receives the £2.50 from HMRC which is on top of the £10 you donated.

The donation must be made personally by you and not from the result of find raising such as cake sales or coffee mornings.

Q: Why do they ask about gift aid if I donate clothes to a charity shop?

A: This confuses lots of people as you are not giving them cash you have earned, so how can they reclaim the tax paid?

In fact, the charity shop is allowed to calculate the value of the gods you donate and then treat it as a cash donation and claim the tax paid as if it were made in cash.

They will ask you to fill out a declaration form to show you are paying tax. Once oyu have done it for the first time, I find they just use the old form and you never have to do it again as they will have it on record.

You have to be paying at least the amount of tax you are reclaiming.

Q: If you are a higher rate taxpayer can you get more tax refunded?

A: The charity can only claim the basic rate of tax. But if you are a higher or additional rate taxpayer, you can claim a tax rebate personally on charitable donations.

So, if you are a higher rate taxpayer paying 40% income tax and you donate £100 to a charity, the charity can use Gift Aid to actually receives £125. But then in addition you can claim 20% of £125 as tax relief because 20% is the difference between your tax rate and the basic income tax rate. To claim the tax relief you need to enter it on your self-assessment form and you are given the money by way of increasing your personal allowance.

Q: My company talks about Payroll giving – what is that and what is the advantage?

The Payroll Giving scheme, also known as Give As You Earn allows you to make donations direct from your PAYE income before income tax but after National Insurance deductions. In effect this means it costs you less to donate more. But you are befitting from the tax regime not the charity, as the charity cannot claim the additional Gift Aid funding.

Payroll giving allows you to give more by paying less, in the following way:

• Basic rate taxpayers will see £8 deducted from their salary to donate £10 to a charity

• Higher rate taxpayers will see £6 deducted from their salary to donate £10 to a charity

• Additional rate taxpayers will see £5.50 deducted from their salary to donate £10 to a charity

To use the Payroll Giving scheme you must speak to your employers. The scheme that manages the donations can take around 4% in admin fees but sometimes the employer pays this – so it is worth checking.

Q: How do I check if a charity is legit?

A: Do not be put off supporting the important work of charities. The government's charity website advises that you may wish to make sure you are safely giving to genuine charity collectors by checking the charity’s name and registration number on the charity register. This isn’t a guarantee that your funds are used in the way you want them to be, but it does offer you some confidence that the charity is being regulated.  

Q: How best to leave a gift to a charity in your will?

A: Leaving a gift in your will to a charity is free from inheritance tax. If you leave 10% or more of your net estate to charity, you will benefit from a lower inheritance tax rate of 36% . However, there will be less in the pot to pass on to loved ones, so the lower tax rate is not as great as it sounds but can be beneficial to you nonetheless

IHT is normally charged at 40% on any estate worth more than £325,000.

According to Ridgefield Consulting, “under the Inheritance Act, a beneficiary could dispute your will if they believe it didn't make sufficient financial provision for them. They could also argue that you weren't of sound mind or that you were coerced into making the will, which it can be good to create these gifts with a lawyer.”