Limited company charitable donations vs personal charitable donations

Making a donation to a charity is a fantastic thing to do, and if you can get some tax relief along the way, even better!

In this article we explain how tax relief for charitable donations work when they are paid by a limited company and compare this to personal donations.

 

Charitable Donations - Limited Company vs Personal

 

Charitable donations made by limited companies

Donations made to a charity or community amateur sports club (CASC) will be an allowable expense for your company which will help reduce the corporation tax bill.

If a donation of £500 is made this will reduce the company’s taxable profit by £500, which based on the 19% corporation tax rate for the 21-22 tax year will result in £95 of corporation tax savings.

There are some rules to be aware of though:

  • There cannot be any conditions attached to the donation
  • Donations cannot exceed the taxable profit of the company for the period (as this would create a corporation tax loss which is not permitted by donations)

Also, any benefits you’re given in return for making a donation (for example receiving tickets to an event) must be below a certain value in order for the donation to be allowable – these limits are:

  • Donation of up to £100 – maximum value of the benefit received must be 25% of the donation
  • Donation of £101 to £1,000 – maximum value of the benefit received must be £25
  • Donation of over £1,000 – maximum value of the benefit received must be 5% of the donation (up to a maximum of £2,500)

These rules apply to benefits given to any person or company connected with your company, including close relatives.

There are other ways for a company to donate to a charity than cash:

  • Equipment – if your company donates equipment to a charity, such as office furniture or computer equipment, as long as the equipment has been used by your company you can claim capital allowances on the cost of equipment
  • Trading stock – your company can donate some of its stock to a charity or CASC – this means you don’t include these items as sales income, so you get corporation tax relief on the cost of the stock you’ve donated. There are potential VAT issues here which this article doesn’t cover
  • Employee’s time – your company may provide some of your employee’s time to a charity – you’re allowed to continue to allocate the employee salary costs against your taxable profits. However, you can’t claim the costs of employees that are on secondment or volunteering at a community amateur sports club (CASC), only at a charity

No Gift Aid declaration is required for company donations to charities and CASC’s, unlike with personal donations which we cover further in this article, however you should still ensure you keep documentation that supports the donations made.

 

Sponsoring a charity

Your company may instead decide that it wants to sponsor a charity – sponsorship payments are different to donations and as long as your company is getting a business-related service in return the cost will usually be allowable for tax, however you should ensure that the charity you are sponsoring:

  • publicly supports your products / services
  • allows you to use their logo in your own printed material
  • allows you to sell your businesses goods or services at their event / premises
  • links from their website to yours

Examples of where HMRC may disallow sponsorship payments are:

  • The main reason for the sponsorship comes from a hobby or interest
  • The sponsorship includes an element of hospitality, HMRC may treat this as disallowable entertaining
  • The business being sponsored has a family link to the sponsor

 

Personal charitable donations

Typically when you make personal donations to a charity or community amateur sports club (CASC) these are done through Gift Aid.

This allows the charity to claim an extra 25 pence from the government for every £1 donation you make.

Essentially, the charity is reclaiming from HMRC the 20% basic rate of tax that you would normally have paid on the money you have donated.

One thing to be aware of is that your donations should not exceed 4 times the amount of tax you have paid in the tax year, otherwise it will cause tax issues.

The charity will ask you to complete a gift aid declaration which states that you have paid sufficient tax to cover the 20% of tax that they will be reclaiming.

If you are a higher rate taxpayer, you will be able to claim some tax relief on your donations – the way this works is that your basic tax band gets pushed up by the total gross donations made.

For example, if you donate £1,000 to charity, this gets grossed up to £1,250 (£1,000 / 80%) which then pushes up your basic tax band by £1,250.

If your total employment income in the 21-22 tax year was £60,000, for example, and you make £1,000 of gift aid donations in the tax year, this will then mean £1,250 of that income will be taxed at 20% rather than 40% (using UK tax rates) which saves £250 of personal tax.

You can reclaim this tax through your personal tax return, or if you don’t file a tax return you can contact HMRC to provide them with the details of your gift aid donations.

Tax relief for gift aid donations can be particularly tax efficient if you are trying to limit the impact of the High Income Child Benefit Tax Charge or the reduced personal allowance when your income exceeds £100,000.

 

High Income Child Benefit Tax Charge

If you receive child benefit and your income (or your partners) exceeds £50,000, you will have to repay back any child benefit received at a rate of 1% for every £100 that your income exceeds £50,000, until it is fully repaid once your earnings hit £60,000.

Personal donations to charity can help mitigate some of this impact as the gross donations made increases the £50,000 starting threshold.

For example, if your income is £52,000 you would usually have to repay 20% of the child benefit, but if you have made £2,000 of gross charity donations in the tax year, none of the child benefit will need to be repaid.

Note: a £2,000 gross donation = a £1,600 cash donation (because the difference is the 20% gift aid).

 

Income over £100,000

The standard tax-free personal allowance for the 21-22 tax year is £12,570 – which means the first £12,570 of income is tax free.

However, your Personal Allowance is reduced by £1 for every £2 that your adjusted net income is above £100,000.

So, for the 21-22 tax year your personal allowance is zero once your income hits £125,140.

The effective impact of this is that there is an additional 20% taxation for income between £100,000 and £125,140.

As with child benefit, personal donations to a charity can help reduce some of the impact of this as the £100,000 threshold will increase by the value of any gross charity donations in the tax year.

For example, if your income is £105,000 but you make £4,000 of donations to charity, your personal allowance will not be reduced. This is because £4,000 of charity donations is grossed up to £5,000, which pushes the starting point of the personal allowance withdrawal from £100,000 to £105,000.

 

Charitable donations – company vs personal

If you run your own limited company and are a basic rate tax payer then it’s probably best to make charity donations directly from your company as your company will get the corporation tax relief, whereas if you did them personally from your own cash you wouldn’t receive any tax relief – however the charity will miss out on its gift aid claim so you have to bear that in mind.

If you’re a higher rate taxpayer you may prefer to make the donations personally, as this will have the double benefit of giving you some higher rate tax relief and also allow the charity to claim gift aid.

 

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