The government offers a number of tax breaks as a way to encourage more people to give money to charity. These donations primarily benefit from reliefs to income tax, capital gains tax (CGT), and inheritance tax (IHT).
If you want to regularly give to the same charity, the most tax-efficient way to do so is before you pay any income tax.
Read more about claiming tax-relief on charitable donations.
How does payroll giving work?
You can donate to charity before tax is deducted from your income, which makes it tax efficient. The gift is deducted after national insurance contributions but before income tax is deducted. This means that giving £1 would cost 80p if you’re a lower rate taxpayer, 60p if you’re a higher rate taxpayer and 55p if you’re an additional rate taxpayer.
However, you can only do so if your employer allows it. It must be signed up to a payroll charity scheme such as the Charities Aid Foundation's Give As You Earn, which is a government-funded payroll giving scheme. You then simply nominate your charities and say how much you want to give – and your choice can be changed at any time.
If your employer doesn’t have a scheme, they can set one up by registering with a Payroll Giving agency.
The number of people donating to charity from gross income increased from 1 million in the 2012-13 tax year to just over 1.1 million in the last tax year, according to figures from the Treasury.
No longer on the payroll?
There are other ways to help charities. You can donate shares worth £200 or less, using the website sharegift.org. It is aimed at those who have small holdings in companies but cannot be bothered to cash them in, perhaps because of dealing costs. By donating via the site, all dealing charges are waived.
If you donate part of your estate to charity, it will be excluded from inheritance tax calculations.
Read more about leaving money to a charity in your will.
If you donate in the usual way, don’t forget to sign up to Gift Aid, which allows charities to claim back any basic-rate income tax paid on donations. For every £1 donated, the charity – as well as community amateur sports clubs (CASCs) - receives £1.25. If you pay tax at a rate of 40% or 45%, you can claim the difference between the higher and basic rate on your donation.
What is Gift Aid?
How generous are we?
The number of charitable donations over the £1 million mark hit a record high last year, according to the latest Coutts Million Pound Donors Report, published late last year. It recorded that there were 292 individual donations of £1 million or more in 2013, up 50% from the previous year. Britons ranked third in the list, gifting nearly £1.4 billion, compared with £10.6 billion from Americans and £1.7 billion from Chinese benefactors.