Donations – Don’t miss out on getting a tax deduction

Getting a tax deduction for donations

Getting a tax deduction for donations

TAX DEDUCTIONS FOR DONATIONS

Charitable donations are one of the areas which tend to cause business owners unnecessary concern when it comes to getting a tax deduction.

The main part of the legislation is contained within CTM09060, which states that provided the donation is made to a registered charity then the payment will qualify for a tax deduction.  The deduction works differently for Companies and individuals in the following ways:-

INDIVIDUALS

If you as an individual give money to charity then you can make a declaration to the charity that you are taxpayer.  That enables the charity to claim back an additional 20% on the money you have generously donated.  The good news for you is that if you're a higher rate taxpayer, and complete a Tax Return, you can claim an additional 20% on the donation you have made.

Example A :- Trevor, a basic rate taxpayer, makes a gift of £160 to a local charity.  If Trevor completes a gift-aid declaration to the charity, it will be able to also claim back £40 from the Taxman, in addition to Trevor's initial £160.  This makes a gross donation by Trevor of £200 (£160 + £40).  

Bonus 1 - Example B :- If Trevor is a higher rate taxpayer and he completes a Tax he can claim back £40 of tax back from the Taxman on his £160 donation.  Therefore for a payment of £120 from Trevor, the charity receives a donation of £200.  Not a bad return then!

Tax Tip:- If you are a higher rate taxpayer and make donations but do not complete a Tax Return, get in touch with your local Tax Office and inform them of the donations you make each year.  That way they will be able to alter your Tax Coding so you can receive tax relief at source through your payroll.

Bonus 2 - Example C :- If Trevor earns between £100,000 and £120,000 (for the tax year 2014/15) then he will be paying tax at a marginal rate of 60%!  As a reult, he can claim a tax refund of £80 on his donation of £160!  So, assuming Trevor has an income of £110,000, he would only need to make a payment of £80 (after tax relief) in order for the charity to receive a donation of £200.  

Tax Warning - If you don't pay tax, but complete a gift-aid declaration for the charity then the Taxman will recover the 20% tax back from you.  Therefore, going back to Trevor - if he only had earnings of £5,000 he would be required to make a payment of £40 to the Taxman if he had made a tax declaration to the charity.

COMPANIES

Companies are taxed differently to individuals. If your Company is taxed at the small companies rate then tax will be levied at 20%. If your Company makes a donation to a registered charity then you'll be able to get a tax deduction for the gift, however the charity will not be able to claim back 20% tax,  as in the example A above.  Therefore for the Charity to be no worse off the Company would need to donate an additional 20% compared to if you'd make the donation personally using Gift Aid.

So, all would seem very simple for a Company (no higher rate complications). And it is, provided the Company is making a profit. But what is the situation if your Company is making a loss?

DONATIONS AND COMPANY LOSSES

When a Company makes a loss it is prevented from claiming a tax deduction for its donations. As a result,  it is worth thinking more creatively about your donations if you know you are going to make a loss.

Tax tip :- If you know your Company is due to make a loss and you are considering a donation, ask the charity if they will allow you to sponsor them rather than giving a no-strings-attached donation. This will allow you to get a tax deduction even though you have made a loss.

Note:- Click here to read our article on how to make sure you get a tax deduction for your sponsorship costs.

2 Responses

  1. Dear Paul, I'm confused by your comment regarding donations made by companies. You say that the charity will be able to claim back 20% tax. Is this correct? I thought donations made by companies to a registered charity or CASC are not within Gift Aid relief. But a company may receive Corporation Tax relief on the charitable donations it makes as a deduction from its profits. Chris
    • Thank you for pointing that out Chris. You're absolutely right. When Companies make donations to charity the Charity does not get any Gift Aid Relief. Therefore, if you want the Charity to be no worse off (if you're making your contribution through your Company rather than personally) then you would need to add 20% to the amount you're donating. I will edit the text to make this clear.

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