Can I make charitable gifts to reduce my tax band?

[Chrysalis]

For a number of reasons, I have slipped into higher rate tax for the last couple of years. I’m trying to work out if there is any way I can avoid that this year.
My earned income will be about £55,000. Dividend and savings income will be well above the tax exempt amounts.
I will aim to make an additional pension contribution to my SIPP, but I have to be careful regarding annual allowance as I am currently contributing to the NHS pension scheme (about £8400 so that brings taxable pay down to around £46,500) and it is quite difficult to work out exactly how much head room I might have to make additional pension contributions - this would normally be the easiest way to reduce my tax liability.

I do make some charitable donations and could easily increase this, but I have never really fully understood how these interact with personal taxation. If I make some charitable donations, could this reduce my marginal tax rate for the purposes of dividend and interest rate taxation? Also, would it affect my net pay for the purposes of the child benefit charge?
I’m particularly keen to avoid the 37.5% dividend tax rate and the child benefit charge (probably a higher effective marginal rate but capped at around £1700 since they can only take 100% of it!)

Any pointers welcome.

[Howard]

Jabd2001

I am not a tax expert but the answer to your question is broadly "yes". If you give to charity through Gift Aid you can net off your giving against your taxable income. This is easy using the HMRC self assessment site. In fact you can use the site to do a "What If" calculation by putting in your expected financial year-end figures to see the result but then not saving the information until it becomes a fact at the end of the year.

An easy way to monitor your charitable giving is to use a service like Charities Aid Foundation. If you think you might be giving significant amounts long-term this might be worth considering. As a client of CAF for over 40 years I have found them a very good organisation to deal with.

regards

Howard

[PinkDalek]

Child Benefit

The https://www.gov.uk/child-benefit-tax-calculator is available for years up to 2017-18 and, yes, qualifying charitable donations reduce the 'adjusted net income'. Looking briefly there, I think but haven't checked you enter the grossed up for basic rate tax amount for charitable donations.

There is no child benefit tax charge if your adjusted net income is below £50,099.

There's some examples regarding the calculations of adjusted net income in the link below. Note for these purposes the calculation ignores matters such as personal allowances, dividend and savings allowances but is after pension contributions.

https://www.gov.uk/guidance/adjusted-net-income which includes:

What adjusted net income is

Adjusted net income is total taxable income before any Personal Allowances and less certain tax reliefs, for example:
trading losses
donations made to charities through Gift Aid
pension contributions paid gross (before tax relief)
pension contributions where your pension provider has already given you tax relief at the basic rate

See also https://www.gov.uk/child-benefit-tax-charge

What counts as income

To work out if your income is over the threshold, you’ll need to work out your ‘adjusted net income’.
Your adjusted net income is your total taxable income before any personal allowances and less things like Gift Aid.
Use the Child Benefit tax calculator to get help with your adjusted net income.

https://www.gov.uk/child-benefit-tax-calculator


Charitable Giving

Have a look at Page TR 4 below (which is for 2017-18). You'll note for those purposes you not only claim the payments made in the tax year concerned but can also claim for payments made up to the date of the return (if that suits and remembering, of course, not also to claim the same payments in the next tax year).

https://assets.publishing.service.gov.u ... 18__1_.pdf

[Chrysalis]

Thanks PD. Would I be too late, having already submitted last year’s return, to be able to offset a donation this year against last year?

[PinkDalek]

Thanks PD. Would I be too late, having already submitted last year’s return, to be able to offset a donation this year against last year?

Both that page and the one below suggest you are too late:

https://www.gov.uk/government/publicati ... iving-2018

The latter includes:

Payments made on or after 6 April 2018 can only be included in the return for the year ended 5 April 2018 if your return is sent to reach HMRC before the appropriate filing date. You must make any claim to carry back a Gift Aid donation to the previous tax year in your original tax return for the year ended 5 April 2018. HMRC can’t accept a first claim or a higher claim in an amended tax return for the year ended 5 April 2018.

[scotia]

Jabd2001
An easy way to monitor your charitable giving is to use a service like Charities Aid Foundation. If you think you might be giving significant amounts long-term this might be worth considering. As a client of CAF for over 40 years I have found them a very good organisation to deal with.

Agreed!

[Dod101]

I am sure you will not be interested, but from the point of view of the recipient charity, the CAF is a pain, because of course the charity receives money which has already received its refund of tax, and so the charity cannot claim the extra 20%. Most donors in my experience do not take that into account in deciding how much to give a charity via CAF. Furthermore,the CAF donor uses a daft cheque-like bit of paper (issued by CAF) so that the charity needs to claim directly from CAF rather than bank the cheques in the usual way.

Dod

[Howard]

I am sure you will not be interested, but from the point of view of the recipient charity, the CAF is a pain, because of course the charity receives money which has already received its refund of tax, and so the charity cannot claim the extra 20%. Most donors in my experience do not take that into account in deciding how much to give a charity via CAF. Furthermore,the CAF donor uses a daft cheque-like bit of paper (issued by CAF) so that the charity needs to claim directly from CAF rather than bank the cheques in the usual way.

Dod

I couldn't disagree more. The only exception is for those who give very small amounts. Are you talking about a few pounds here?

Any serious giver will not find charities carping about thousands of pounds given by CAF. In my experience they are delighted to receive the gift.

regards

Howard

[Dod101]

Howard. Disagree if you like. Of course charities will not carp at receiving a gift but that is not what I am saying. What I am saying -did not quite spell it out- is that if a donor wants to give say £1000 to Charity A, he reaches for his cheque book, rights a cheque and asks the charity to treat as a Gift Aid Donation. Charity A says thank you very much, claims the Gift Aid and ends up with an extra £250 from HMRC. With a donation via CAF, most donors will again send a £1000 donation but this time the charity can claim nothing extra and so instead of receiving £1250 they end up with £1000. The donor still feels good about it but in fact has given the charity £250 less. Very large donors may treat the matter differently but I am talking about donations well in to four figures and the principle applies for any amount actually.

I have been a treasurer of a number of small charities over the years and that is the way it works out in every case that I have seen. Of course the charity will not carp; they are grateful to receive the donation for whatever amount. And the treasurer, instead of banking the cheque from CAF needs to go back to them separately to claim directly from them.

Dod

[JonE]

Charity A says thank you very much, claims the Gift Aid and ends up with an extra £250 from HMRC. With a donation via CAF, most donors will again send a £1000 donation but this time the charity can claim nothing extra and so instead of receiving £1250 they end up with £1000. The donor still feels good about it but in fact has given the charity £250 less.

Although happy enough to receive a CAF voucher, I always preferred a gift-aided donation from a tax-payer not only because of the direct Gift Aid claimable but also because the level of Gift Aid claims has a bearing on how much the charity can claim under the small donations scheme. If the charity receives most donations via bucket-collection equivalents then every quid of gift-aided donation can add extra leverage.

Cheers!

[scotia]

Furthermore,the CAF donor uses a daft cheque-like bit of paper (issued by CAF) so that the charity needs to claim directly from CAF rather than bank the cheques in the usual way.

I can't remember when I last issued a CAF cheque. I carry out my donations via CAF online. CAF keeps a record of my donations, so annually, when I make most of my CAF donations, I simply click my way through a list, and within days most recipients email their thanks. The extra 25% is a red herring - I am perfectly capable of knowing how much, in total, I am donating, and the recipient has no extra work in recovering tax.
Way back when I started using CAF, there was no tax refund available on single gifts of less than £500 (I think). So a single payment to CAF for greater than £500, to be onward distributed in smaller amounts, was by far the most tax efficient way of charitable giving.
Although this restriction has been lifted, CAF still offer an excellent service for conveniently donating to a wide range of charities.

[Dod101]

JonE has made my point. I agree that most donations are made online nowadays so maybe CAF cheques are not much used and that was the red herring if you like because it was simply a minor inconvenience for the treasurer of the benefiting charity.

But the extra 25% for the charity is certainly not a red herring and CAF is really much more beneficial to the donor than to the donee. I know that donors are perfectly capable of knowing how much they are donating in total; no calculation required, it is the amount of their donation if paying via CAF. For a gift aided donation where they are donating out of taxed income, many donors I am sure just tick the Gift Aid box without thinking too much about it, and so the donee, the charity, gets an extra 25%.

Anyway all this is peripheral to the OP's query.

Dod

[Howard]

JonE has made my point. I agree that most donations are made online nowadays so maybe CAF cheques are not much used and that was the red herring if you like because it was simply a minor inconvenience for the treasurer of the benefiting charity.

But the extra 25% for the charity is certainly not a red herring and CAF is really much more beneficial to the donor than to the donee. I know that donors are perfectly capable of knowing how much they are donating in total; no calculation required, it is the amount of their donation if paying via CAF. For a gift aided donation where they are donating out of taxed income, many donors I am sure just tick the Gift Aid box without thinking too much about it, and so the donee, the charity, gets an extra 25%.

Anyway all this is peripheral to the OP's query.

Dod

Donors who give thousands of pounds to charities on a regular basis tend to be fairly sophisticated individuals who know what they are doing and the tax implications. To suggest that they don’t is an indication that one doesn’t understand the motivations of significant donors.

Giving is a bit like investing. There is not much point in considering the tax implications if you invest £50 in a company. If you are a regular major donor you fully understand the tax issues.

As someone who raised funds for a charity for a while, receiving a gift of say £5000 or larger from a CAF account I must admit I didn’t think that the donor should have given more, I accepted it gladly, made sure they were thanked appropriately and understood they were almost certainly aware of the tax benefits.

From a charity viewpoint, donors who tried to restrict the use of their gifts for unnecessarily restricted purposes were the real headache!

CAF are an organisation who are helpful for smaller donors, but provide an even better service for larger donors. Their online service is excellent for single or regular gifts up to £10,000. For larger gifts, yes, their cheques are more appropriate. The advantage for both these methods is that CAF check that the recipient is a registered charity. So the chances of a significant donation going astray is very unlikely. This is generally a more secure method of giving than using a bank.

I can see that for very small amounts, the CAF system involves a little more administration for a charity. But any charity administrator who carps at a more secure system should be careful. Major donors have a choice and can give instead to charities who welcome their gifts through a secure system.

For anyone paying higher rates of tax and considering giving to charity it is well worth the discipline of setting up a CAF account. Treated with the same rigour as investing,if you are young and you start a habit of regular giving and review it as you get older and, hopefully richer, then it can lead to some brilliant experiences if you choose your charities wisely and get involved in how your donations are spent.

regards

Howard

[Dod101]

I do not disagree with anything that Howard says and I do not think he has mentioned (but might have) that donors who pay higher rate tax can recover the higher rate tax from HMRC, in addition to the basic rate tax that is claimable by the charity itself (Provided of course that the gift does not come from a CAF account)

Just to emphasise the point I was making, that if an ordinary mortal like me does not have a CAF account, pays tax and gives say £1000 to a charity with a Gift Aid Declaration the tax reclaimable by the charity costs the donor nothing and the charity gets the extra £250 from HMRC. If the same donor is giving a donation via a CAF account he will most likely give the same £1000 and this time the charity cannot claim the extra £250. Thus the beneficiary of CAF is the donor, who sees his charity fund increased by 25% and he can still claim a refund presumably for any higher rate tax he pays. Smaller charities at least who rely on smaller personal donations tend I am certain, to lose out.

I am not saying that CAF does not do a good job, simply that donors do not I think always remember that in the one case the charity can get an extra amount and in the other, not.

Dod

[genou]

If the same donor is giving a donation via a CAF account he will most likely give the same £1000 and this time the charity cannot claim the extra £250.

Dod

But surely CAF claim the gift aid, and there is then 1200 in the CAF account to donate to the underlying charity, so that there is no loss to the them. Am I missing something?

[PinkDalek]

If the same donor is giving a donation via a CAF account he will most likely give the same £1000 and this time the charity cannot claim the extra £250.

Dod

But surely CAF claim the gift aid, and there is then 1200 in the CAF account to donate to the underlying charity, so that there is no loss to the them. Am I missing something?

Only the £50.

[PinkDalek]

More seriously, CAF isn't free, their fees are summarised on the 7th page below (including contributions, as applicable, to CAF and NCVO):

https://www.cafonline.org/docs/default- ... 240518.pdf

[Howard]

If the same donor is giving a donation via a CAF account he will most likely give the same £1000 and this time the charity cannot claim the extra £250.

Dod

But surely CAF claim the gift aid, and there is then 1200 in the CAF account to donate to the underlying charity, so that there is no loss to the them. Am I missing something?

No, I don’t think you are missing something.

Dod is (I think innocently) creating a straw man by suggesting that from a charity’s viewpoint donors are mistakenly giving less than they could.

I prefer to look at it from a donor’s point of view.

To address the issue from the OP’s original question.

If a donor who is liable for tax at 40% decides to give £4,000 split between four charities and to reduce his or her tax bill they can choose at least two ways of doing this.

First method:

They can give £1000 to each of the four charities and declare that they want to give by Gift Aid. The charities can then claim 25% tax back from HMRC. They each get £250 from HMRC.

The donor must remember that they gave 4x £1000 and declare this on their self-assessment. HMRC will reduce the higher rate donor’s tax bill by 4 x1250 x 20% = £1000.

Second method:

The donor realises that they are going to have to pay higher rate tax for many years in the future and they want to tax-effectively give to a number of charities every year. The charities and the amounts may change over the years. The donor wants to minimise the administration as they don’t want to have to remember each gift.

So they decide to use a CAF account and give the total of £4000 to CAF (this can be in installments or whatever the donor decides).

CAF credits the donors’ account with £4000 and claims the 25% tax back from HMRC which it puts into the donors account less 4% charge. (I have always viewed this as a charitable donation as CAF helps charities in a number of ways - see page 7 of the CAF brochure which PinkDalek has helpfully linked above).

So the donor now has £4,800 to give to charities. (£5,000 less 4%). They can give £1,200 to the four as above or whatever they choose. The CAF account allows electronic payments to be made or cheque payments.

And the good news is that they have only one donation to tell HMRC about. HMRC reduces their tax bill by £5,000 x 20% = £1,000 as in method 1.

So charity A might have received a gross amount of £1,250 from method 1 but only £1,200 from method 2, because of CAF’s 4% charge. (This charge reduces for donors giving larger amounts per year).

The more charities a donor supports the simpler it is to use CAF compared with method 1.

However, if a donor is giving a very small amount overall and splitting it between lots of charities and giving them all cheques then Dod has a point, as each charity has to cash the small value cheque with CAF which is an admin task. The OP isn’t in this situation as he/she implied the gifts would be fairly substantial each year.

To be frank the reason I have used CAF for more than 40 years is because it is a great way to support a number of charities with the minimum of personal administrative hassle. And if you are lucky enough to be able to give significant amounts the tax rebates get better the more you give!!

Hope this post is helpful. PinkDalek, I'd welcome your comments if I have made any errors in my calculations.

regards

Howard

[scotia]

I have used CAF for more than 40 years is because it is a great way to support a number of charities with the minimum of personal administrative hassle.

For the same reasons, I have used CAF for over 20 years.

[Lootman]

I have used CAF for more than 40 years is because it is a great way to support a number of charities with the minimum of personal administrative hassle.

For the same reasons, I have used CAF for over 20 years.

Has Gift-Aid been around that long?