Charity donations and tax relief - how it works

1. Donating using Gift Aid

What is Gift Aid?

Gift Aid is a scheme available to charities and Community Amateur Sports Clubs (CASCs) in the UK. Put simply, it means every donation is topped up by 25% from HRMC, in other words, for every £1 donated, the charity or CASC can claim an extra 25p.

How does Gift Aid work?

Like all things linked with tax, there are rules around how it works. For example, the donator must be a UK taxpayer and sign a Gift Aid declaration. Donations also can’t be more than four times what the individual donator has paid in tax that tax year (6 April to 5 April).

Higher rate or additional rate taxpayers can claim further income tax relief in respect of the gift through their tax return or PAYE tax code, if applicable.

You can find out more on the UK government website.

2. Payroll deduction schemes (Give As You Earn or payroll giving)

What is a payroll deduction scheme?

Payroll deduction schemes, also known as payroll giving or Give As You Earn, are a tax-effective way of making regular charitable donations directly from your gross salary (before the tax is deducted).

Payroll giving makes charitable giving more tax-efficient and convenient for employees, provides a consistent source of funding for charities, and benefits employers by promoting corporate social responsibility.

For employees, it means your donation is taken from your pay before income tax is calculated, giving immediate tax relief on your contributions. This allows you to give more for less, as the donation comes out of your pre-tax income. The exact amount of tax relief depends on your tax rate.

How does a payroll deduction scheme work?

Employers play a crucial role in setting up and administering this scheme. They deduct the chosen donation amount from employees’ pay before tax but after National Insurance, then send these contributions to a Payroll Giving agency, which, in turn, forwards the funds to selected charities.

There may be administration fees associated with running the scheme, but these can be covered by the employer, ensuring  the full donation amount goes to the designated charities. For charities to be eligible, they need to be recognised by HMRC and use the donations for charitable purposes.

3. Giving to charity in your will

What is donating to a charity in your will?

Did you know half of UK adults don’t have a will. So, if you’re currently in the need to write a will or are considering updating your current will, it’s well worth considering leaving a charitable donation.

Donating to charity in your will is a generous act and can also be a financially helpful by reducing your Inheritance Tax (IHT) liability. You can choose to donate a fixed amount, an item or what’s left after other gifts have been given out.

How does donating to a charity in your will work?

Any amount left in your will to charity is exempt from IHT. This means that if you make a gift to charity, the ‘net estate’ is reduced by the amount of the gift. So, making a charitable donation can reduce the amount of IHT you pay. There are rules, for example if the value of the estate exceeds the nil rate band (currently £325,000), the estate may qualify for the residence nil rate band (RNRB) and the benefits can be even more significant.

There’s also the ten percent rule, which means if you leave 10% or more of your estate to qualifying charities, it can lead to a reduced Inheritance Tax rate. Instead of the standard 40%, your IHT rate would decrease to 36%. This can result in substantial savings for your estate. If a donation is less than 10% of the estate, it can still mean a reduction in the amount of IHT paid as the amount donated would be deducted from the net estate before the IHT payable has been calculated. You can also take advantage of the tax relief available on certain assets.

While you can write a will yourself, seeking assistance from a legal professional is advisable, especially if your estate is complicated. Remember, for a will to be legally valid, it needs to be formally witnessed and signed.

Find out more

In the tax year April 2022 to April 2023, donations to charities using tax relief schemes were up eight percent year-on-year. Understanding these tax-efficient ways to support charitable causes can make your donations go further and benefit both you and the charities you care about.

Find out more about giving to charity on the Gov.uk website.

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_{This article is correct at time of publishing and for general information purposes only. We recommend you speak to a professional financial adviser for advice. You can find a financial adviser and further personal finance information at unbiased.co.uk.}