It’s great if your business is in a financial position to donate to charity – particularly if you have a few in mind you’re passionate about. Making a donation can also have tax benefits for your business too, making it a win-win!
Let’s go through ways you can donate to charity and receive tax relief for your business.
Can sole traders and limited companies receive tax relief by donating to charity?
Yes – there are ways both sole traders and limited companies can claim tax relief when donating to charity, although it is much easier for a limited company to do so, which we’ll explain next!
Donating as a sole trader or partnership
This is a bit more complicated to do as a sole trader or partnership than if you were a limited company, and that’s because a charity donation won’t count as part of your day-to-day costs.
This means you can’t claim a charitable donation as a tax-deductible business expense. You can still donate to charity from your business bank account though if you wish, and record this as either a non-business transaction or personal ‘drawings’.
HMRC will see it as an individual donation rather than a business one. If you’re a higher-rate or additional-rate taxpayer, you’ll be able to claim tax relief if you use the likes of Gift Aid, either through your Self Assessment, or by contacting HMRC and asking them to amend your tax code.
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What is Gift Aid?
You’ve most likely heard of charities asking you to tick the ‘Gift Aid’ box if you’re a UK taxpayer, and that’s because when you do, the government make a small contribution on top of yours (but only if you qualify). Completing the declaration confirms you’re eligible, so your charity of choice can then claim their extra donation – which is currently an extra 25p for every £1 you give.
Claiming tax relief on Gift Aid donations
Gift Aid allows higher rate taxpayers to claim tax relief on any of their charitable contributions. The charity is allowed to claim back the basic rate (which is 20%), leaving you eligible to claim tax relief on 20-25% of the donation depending on whether you’re in the higher (40%) or additional (45%) rate bracket.
Let’s say you’re a higher taxpayer and donate £50 to a local charity. You confirm that you’re eligible for Gift Aid, so they can claim an extra 25p per £1 of your donation, meaning the amount they receive has gone up to £62.50 at no extra cost to you.
Because you’re a higher rate taxpayer, you’re able to claim 20% of your donation as tax relief, reducing your income tax bill by £12.50.
Donating to charity as a limited company
You can make donations to charity through your limited company – just ensure you keep any supporting documents in regard to the donation so it can be recorded in your accounts as a business expense.
Limited companies pay less Corporation Tax when they give the following to charity:
Equipment or trading stock
Property, land, or shares
Employees (this is where your company transfers an employee to work for a charity, known as secondment)
You’ll claim tax relief by deducting the value of your donation from your business profits before tax.
If you donate land, property or shares to charity, you can get tax relief on both your Income Tax and Capital Gains Tax.
Payments your limited company make that don’t qualify
There are some payments your limited company may make that don’t qualify; these include:
Loans that’ll be repaid by the charity
Any donations made on the agreement the charity will buy property either from your company or anyone associated with it
Payments distributed from company profits, for example, dividends
If your limited company is given something in return for its donation, for example tickets to a football game, the gift must be below a certain value.
Maximum value of benefit
Anything up to £100
25% of donation
£1,001 and above
5% of the donation (the maximum is £2,500)
This applies to any person or company connected with yours – including close relatives. If you receive a benefit related to your company, your donation will be classed as a sponsorship payment.
Can my employees claim tax relief by donating to charity?
Yes – they can do this via a payroll donation scheme. This is where you (the employer) allow your employee to make automatic donations from either their monthly salary or pension contributions. The donation amount will not be subject to tax, but they will still pay National Insurance contributions.
How much tax relief they get depends on which tax bracket they’re in. For example, to donate £1 they’d pay:
Basic rate taxpayer
Higher rate taxpayer
Additional rate taxpayer
How do I claim tax relief after I’ve donated to a charity?
If you’ve donated to a charity as a sole trader or business partnership and you’re eligible to receive tax relief, you can include this when you fill out your Self Assessment Tax Return. If your limited company has donated to charity, you’ll include this information on your Company Tax Return.
It’s important to ensure you keep records of all donations made, in case HMRC ask to see them!
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