Summary
- Gift Aid boosts the charity’s receipt and gives higher‑rate taxpayers extra relief, but donations are made from already taxed income.
- Company donations don’t qualify for Gift Aid but reduce corporation tax, lowering the net cost if the company is profitable.
- Paying extra salary to fund personal donations can trigger income tax and NI (up to c.23% combined), often wiping out Gift Aid benefits.
- In many cases, making the donation through the company is more tax efficient, particularly where profits (and CT liability) cover the gift.
You’re an owner manager and want to make a £5,000 donation to a local charity. You’ve claimed income tax relief under the gift aid scheme for smaller amounts but could it be more tax efficient to make the donation via the company?
Charitable giving
Whether an organisation provides aid to those in need across the globe or offers local sports facilities for the young, they can register as a charity in the UK and take advantage of a general tax exemption on donations they receive. This means charities get a tax bonus where the donation is made under the gift aid scheme.
Gift aid
A donation can only be made under gift aid by an individual. So a director can use the scheme, but their company can’t. When you tick a box on a form saying you’ll gift aid your donation it’s automatically treated as made net of basic rate (BR) tax. For example, a payment of £80 is treated as a £100 donation from which you’ve taken £20 (20%) in tax. Charities can claim back the £20 from HMRC. So the £80 from you becomes £100 in the charity’s bank account. Therefore, for the charity to receive £5,000, you only need to pay it £4,000, as it can claim the additional £1,000 under the gift aid scheme. You can only use the gift aid scheme if you pay sufficient tax during the tax year.
If you pay tax at higher rates, i.e. 40% or 45% you can claim (by entering the details on your self-assessment return) extra tax relief on top of the BR amount given automatically. This means, e.g. that a £5,000 donation will cost you £3,000 if you’re a 40% taxpayer (£5,000 – £2,000 (40% tax relief) = £3,000).
Company donations
There’s nothing to stop your company making a donation to charity, it’s just that gift aid won’t apply. So, at first sight it might seem that a personal donation is the better option. However, there’s more to it than this.
Companies can deduct charitable donations from total profits, which reduces the corporation tax (CT) bill. For example, where your company pays CT at 19% and makes a £100 donation, its tax bill is reduced by £19. The net cost is therefore £81.
If your company doesn’t have a CT bill for the year in which a donation is made, it won’t get tax relief.
The winner is…
A personal donation comes out of your taxed income. If that includes salary then, depending on how much it is, you and your company will pay NI at a combined income of 23% (8% for you and 15% for your company). When you add this to the calculations the advantage of gift aid is outweighed by the NI bill. It isn’t usually tax efficient to pay yourself more in order to make the donation.
A company donation is a more tax-efficient method where in the same financial year as the gift aid donation:
- you pay tax on earnings from your company or you pay higher rate tax on your overall income; and
- the profit on which your company is liable to pay CT on equals or exceeds the donation.
Company donations reduce the level of profits for the purposes of calculating marginal relief. A donation could therefore reduce the overall rate of CT your company pays.
