It feels good to donate to charity, knowing that your money is going to one of the many organisations out there helping those who are less fortunate than ourselves. From a tax point view, charitable donations can have the added benefit of reducing your tax bill.
The process is simplest when it comes to limited companies. A limited company can claim the entire donation as a business expense in the same way as you would claim wages or the purchase of stock.
There are however some rules that can restrict which donations you can claim for. If the donation has a condition for repayment or an arrangement for the charity to purchase property from the company then you will not be able to claim the donation.
If a connected person receives a benefit in exchange for the donation, then the donation will not be claimable if the value of the benefit is above a certain amount. For donations up to £100 this is anything above 25% of the donation value, £25 for donations between £101 and £1,000 and 5% up to a maximum of £500 for any donations greater than £1,000.
A connected person is someone who owns or is employed by the company and their linear family (parents, grandparents, children and grandchildren, etc) or their partner/spouse and their linear family.
Finally, a limited company cannot claim gift aid on its donations as they technically pay the full amount including the tax.
The most common form of donating to charity for individuals will be through gift aid. This allows the charity to claim back tax on your donation, making a £100 donation into a £125 donation as the basic tax rate is 20%. Calculated as 20% of the £125 as £25 added to the £100.
To make a gift aid donation you need to be a taxpayer and paying enough tax to cover the donation, otherwise you could find yourself with a tax bill to cover the additional amount.
If you pay tax at a higher rate you will be able to claim some tax relief for your donations, this will be at the rate of 20% of the total donation for 40% rate band taxpayers and 25% for 45% rate band taxpayers.The percentage is calculated in the same way as the gift aid, for example the £100 donation above, scaled up to £125 would have £25 as 20% allowing a 40% taxpayer to claim £25 against their tax.
This claim can be made on your self-assessment tax return, however if you do not file a self-assessment tax return, I recommend you get in touch with HM Revenue and Customs (HMRC) to find out how to claim.
You can also put the claim against tax in the previous year if you do not pay any higher rate tax in the current year, but this must be done at the same time as your self-assessment tax return for the current year and before the deadline. Alternatively you can contact HMRC and ask how to claim.
Remember to keep records of all your gift aided charitable donations if you plan to claim tax back.
There are other ways for a business to give to charity, including gifts of assets or land which you can find by clicking this link.
If you would like any more advice on the above, or with which other expenses you can claim, please do not hesitate to contact us.