We explain how charitable donations made under gift aid can save you tax.

Question:

“I am a freelance business consultant operating as a sole trader. My annual profit is about £50k. I make about £2k of charitable donations each year – can I claim any tax back on this ?”

Answer:

Donations made to UK registered charities and some amateur sports clubs attract tax relief if they are made under gift aidAs you are a higher rate taxpayer this tax relief will take two forms.

Firstly, the charities will be able to claim gift aid relief which will increase the donations to them by 25 pence for every £1 you have donated – this has the effect of increasing the total of the gifts to £2,500.

Secondly, if the donations are declared on your tax return, your total level of basic rate band will increase by the gross amount of the gifts (£2,500) meaning that you will pay less tax at your highest marginal rate.

The below example is based upon the 2015/16 tax rates and excludes national insurance.

As you can see the total tax owed after the charitable donations have been taken into account is £500 lower than if no donations had been made. This is due to a further £2,500 of income being taxed at 20% as opposed to 40%. This reduces the net cost of the donations to £1,500.

The gift aid donations should not be logged as an expense of your sole trader business but are entered in your personal tax return in the gift aid section.

You will need to keep records showing the date, the amount and which charities you’ve donated to.

If in the future you were to incorporate your business there are different rules and factors to consider regarding charitable giving.

It might be worth considering being a limited company at the level of profits you have – see our article here which provides a case study.