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
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).
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?
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.
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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