Happy Christmas – a time for giving, for reflection and sparing a thought for those less fortunate. Martyn Charlwood, our investment and pension specialist explains how making charitable donations can help those in need and possibly improve your own tax position.
Having spent all year providing tips on how to make the most of your money and improve your overall wealth it might seem out of character to now talk about spending it.
Anyone with first-hand experience of charities will be aware of the difference they make and the importance of personal donations. Perhaps not so well known is that donating via Gift Aid can be a tax benefit for the receiving charity as well as the donor.
If you are a UK tax payer and making contributions to a charity, a great way to do this is via the Gift Aid scheme. There are no costs other than your actual gift and this means that the charity can claim basic rate tax on every pound donated. For a basic-rate taxpayer, this adds 25% to the value of any gift made e.g. if you donate £1,000.00 the total value of your donation to the charity is £1,250.00. Higher-rate and additional rate taxpayers can claim income tax relief above and beyond the amount claimed directly by the charities.
In addition to all the good your donation can achieve, you may also be able to substantially improve your overall tax position. If you receive taxable income over £100,000.00 your Personal Allowance (the amount you can earn without paying any tax) will be reduced by £1 for every £2 over that amount. This means your Personal Allowance is reduced to nil once your income is over £120,000.00. However, if you make Gift Aid payments, the amount you donate plus the basic rate tax will be deducted from your total income and the reduced figure will be used to work out your taxable income. As an example, during the financial year 2014/2015, an individual with a taxable income of £120,000.00 who chooses to make a Gift Aid contribution of £1,000.00 could save themselves a tax charge equating to 50% of the amount donated – the net effect meaning the chosen charity receives £1,250.00 with the net cost to the individual equating to £500.00.
With Christmas just around the corner may I wish you all ‘good tidings of great joy’ and of course a happy, healthy and prosperous New Year.