Donations – personal vs company

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Donations - should they be paid personally or by your Limited Company?

I've already written about the tax efficiency of making donations here.  But I wanted to expand on this for those who have their own limited company.

When you have a company you have the choice of whether to make your donations personally or through your Company. But which is the most tax efficient?

Gift aid relief

Getting a tax deduction for donations

Getting a tax deduction for donations

Registered charities can claim Gift Relief on donations that you make to them personally, provided you are a taxpayer.  But note that gift aid is only applicable to individuals.  Donations made by Companies are not eligible for Gift Aid.  So, a director can use Gift Aid, but not their Company. Read my previous article to see how the Gift Aid scheme works.

Individual's Tax Saving Tip :-  If you pay tax at 40% or 45% you can claim extra tax relief on top of the basic relief automatically given at source.  Therefore donations that cost you just £60 (£55) if you’re a 40% (45%) tax payer will result in £100 of donations to the charity (you pay £80 to the charity, the charity claims £20 Gift Aid (making £100) and you claim additional tax relief of £20 for being a 40% tax payer (£25 if you're a 45% taxpayer).

Company donations

There’s nothing to stop your company making donations to charity.  The downside is that Gift Aid won’t apply, meaning you'll need to donate more money for the charity to no worse off compared to if you made donations as an individual.  So, at first sight, it might seem that personal donations are the better option. However, there’s more to it than that.

Corporation tax relief

Companies get tax relief in the form of a credit against their corporation tax bill. For example, if your company pays corporation tax at 20% and donates £1,250, its tax bill is reduced by £250 for donations of £1,250 (£1,250 x 20%). The net cost to the Company is therefore only £1,000.  Just remember to adjust the donations for the lack of Gift Aid.  Therefore Company donations should be 25% greater than a individual's if you want the charity to end up with the same amount.

Warning. If your Company doesn’t have a Corporation Tax bill for the year in which a donation is made, it can’t claim a tax credit - although read my article on how you can get round this.

Company or personal?

Company vs personal

Company vs personal

A personal donation comes out of your taxed income.

Let's say you use your Company to pay a salary up to the PAYE threshold and you pay the balance of your income using dividends.  Assuming that your dividends don't take you over the higher rate threshold for personal tax then it makes no difference whether you make donations personally or using your Company.

Example 1:- Assuming the circumstances above: your Company makes donations of £1,250.  It will receive £250 corporation tax relief on this, making a net cost to you/your Company of £1,000.  To achieve the same donation for the charity by paying personally as an individual you would need to take a dividend of £1,000 from the Company, pay that to the Charity, on which it would receive a Gift Aid uplift of £250, making total donations of £1,250.  Both methods result in a cost to you/your Company of £1,000.

But what if you pay higher rate tax on your dividends?:-

Example 2:- The situation works out slightly differently if you pay higher rate tax on your dividends.  In such circumstances, in order to get £1,000 in your hands the company will need to pay a dividend of £1,333.33, an additional cost to the Company of £83.33.  It gets worse - you will personally pay £52.25 more tax on the additional dividend than you get back in tax relief on the donation.  That makes a total additional cost of £135.58 by paying donations personally compared to paying it through your Limited Company on donations of £1,000.

And what happens if you pay a salary rather than dividends?:-

Example 3:-  If you pay yourself with salary through the Company, then, depending on how much you pay, you and your company will pay NI at a combined income of 25.8% (12% for you and 13.8% for your company).  As a result of this, even if you're a basic rate taxpayer,  once you've added NIC to the calculations the advantage of gift aid is outweighed by the NI bill.  Therefore, on a gift of £1,000 a company donation could save you £100 compared with one made under gift aid.  Therefore, in this situation, it is also more beneficial to pay donations through the Company. 

Conclusion

So is there a general rule you should follow in order to guide you when deciding whether to pay donations using the Company?  I think there is, which is always pay donations through your Limited Company because it is going to be as or more tax-efficient to do so, unless the Company does not pay Corporation Tax.


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8 Responses

  1. Great article - thanks Paul :-)
    • Thanks Stuart. Hopefully it help avoid all those unintentional tips we leave the Taxman everyday.
  2. Hey, thanks Paul - this is just what I was looking for! It seems I was given some bad advice on this years ago by my old accountant, who said it would make zero difference either way when I asked specifically this question. But I spotted something about Corporation Tax relief in an article the other day and thought I'd check again, and I'm glad I did! I pay the higher rate tax on my dividends (example 2 in your post) so that adds up to quite a large difference actually! I've asked my current accountant for a second opinion, but your sums pretty much line up with what I was thinking. Thank you!!
  3. Hi, me again. Is your example 1 correct? I thought the charity could only claim back that Gift Aid on taxes you had paid personally, but in that scenario you might not have paid enough tax for them to get that Gift Aid...?
    • Hi Paul - provided you are a taxpayer and have paid enough tax to cover the Gift Aid credit then the Charity can claim the additional relief. Dividends have a tax credit deducted off them at source (10% of the gross dividend). Therefore, provided you have suffered enough tax at source on the dividends to cover the Gift Aid then the Charity can make the full claim.
      • Ah, yeah - that makes sense, thanks! Regardless, I'll be paying direct from my company from now on anyway.
  4. Ok so what am I missing here. Co has extra £1333 profit it pays to a charity. Charity gets £1333, no CT on those profits. Or pays dividend after tax of £1066.40 which is paid personally to charity so charity still gets £1333. Higher rate tax payer has gross income of £1184.89 but extended basic rate band of £1333 so he pays £33.32 less tax than if no dividend and no personal charitable donation.
    • Thanks for looking Fred. I think what you are overlooking is the higher rate tax that the taxpayer will need to pay on the dividend of £1,066.40, which is £266.50. That will leave the taxpayer only £799.80 to donate to the Charity. Even with gift aid, the Charity will be worse off (receiving only £999.75). The taxpayer will receive tax relief of £199.95, which they can choose to also give to the charity under gift aid. However, even if they do this the Charity will still only receive a total £1,249 instead of the £1,333 it received from the Company.

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