Are Charitable Donations Tax Deductible

At Towerstone, we provide accountancy services in Bedford to local sole traders, landlords, and limited companies. We have written an article about Are Charitable Donations Tax Deductible to help you understand when donations qualify, what evidence is needed, and how relief is applied.

This is a question I am asked regularly and in my experience it often comes up around year end or when someone is reviewing their tax bill and wondering what can legitimately reduce it. People are usually happy to support charities but quite reasonably want to understand whether there is any tax relief available and how it actually works in practice.

The short answer is yes charitable donations can be tax deductible in the UK but the way the relief works depends on who you are and how the donation is made. There is a big difference between personal donations business donations Gift Aid and payroll giving. Getting this wrong can mean missing out on relief you are entitled to or claiming something HMRC will later challenge.

In this article I want to explain clearly how charitable donation tax relief works in the UK who benefits how the relief is given and what mistakes I commonly see. Everything here is grounded in how HMRC applies the rules in real life rather than theory.

The basic principle behind charitable donation tax relief

HMRC encourages charitable giving by offering tax relief but it does not work in the same way as normal business expenses.

In most cases you do not deduct the donation from your income directly. Instead the relief is given through specific schemes with Gift Aid being the most common.

The charity must be recognised by HMRC and the donation must be made in an approved way. Donations to individuals overseas charities that are not recognised or informal fundraising efforts usually do not qualify.

Understanding this framework makes the rest of the rules much easier to follow.

Gift Aid and how it actually works

Gift Aid is the most common way individuals receive tax relief on charitable donations.

When you make a donation under Gift Aid you confirm that you are a UK taxpayer and that you have paid enough tax to cover the basic rate tax the charity will reclaim.

The charity then claims an extra 25p for every £1 you donate. This comes from HMRC not from you.

For example if you donate £100 the charity can claim an extra £25 making the total donation £125.

From experience many people assume Gift Aid is the tax relief. In reality it is only part of the picture especially for higher rate taxpayers.

Higher rate and additional rate tax relief

If you pay higher rate or additional rate tax you can claim extra tax relief on Gift Aid donations.

This is done through your Self Assessment tax return or by asking HMRC to adjust your tax code.

The extra relief is the difference between the basic rate tax reclaimed by the charity and your highest rate of tax.

For example if you are a higher rate taxpayer you can claim an additional 20 percent relief on the grossed up donation. For additional rate taxpayers the relief is even higher.

This relief reduces your tax bill rather than increasing the amount the charity receives.

In my experience many higher rate taxpayers forget to claim this additional relief and miss out unnecessarily.

Are charitable donations tax deductible for employees?

Employees do not deduct charitable donations as expenses in the normal sense. Instead they receive tax relief through Gift Aid or payroll giving.

Payroll giving allows donations to be taken directly from gross pay before tax. This means you receive tax relief immediately at your highest rate.

For example if you are a higher rate taxpayer and donate £100 through payroll giving it only costs you £60 after tax relief.

Not all employers offer payroll giving schemes but where they do it is often the simplest and most efficient method.

If you donate personally outside payroll you can still use Gift Aid and claim any additional relief later.

Charitable donations for the self employed

If you are self employed charitable donations are not treated as business expenses.

This is a common misunderstanding. Even though you may see the donation as linked to your business values or community HMRC treats it as a personal donation.

The relief is still available but it is given through Gift Aid rather than reducing business profits.

You declare Gift Aid donations on your Self Assessment return and receive tax relief in the same way as other individuals.

In practice this means charitable donations do not reduce your Class 2 or Class 4 National Insurance because they do not reduce taxable profits.

Charitable donations made by limited companies

This is where the rules change significantly.

Limited companies can usually deduct charitable donations from their profits for corporation tax purposes provided certain conditions are met.

The donation must be made to a UK registered charity or certain other approved bodies.

Unlike individuals companies do not use Gift Aid. Instead the donation is deducted from taxable profits directly.

For example if a company makes a £1,000 donation its taxable profits are reduced by £1,000 which reduces corporation tax accordingly.

From experience this is an area where companies can legitimately support charities and reduce their tax bill at the same time.

However the donation must genuinely be a gift. If the company receives advertising or sponsorship in return different rules apply.

Sponsorship versus donations

This distinction is important and often misunderstood.

If a company sponsors a charity event and receives advertising in return such as logo placement or promotional mentions this is not a charitable donation. It is a business expense.

Business sponsorship costs are usually allowable as normal trading expenses provided they are incurred wholly and exclusively for the purposes of the trade.

Charitable donations on the other hand involve no significant benefit in return.

In practice many payments sit somewhere between the two and need careful treatment.

From experience HMRC looks closely at this area during corporation tax reviews.

Donations of goods or assets

Cash donations are the most common but people also ask about donating goods shares or land.

For individuals donating goods to charity the tax relief position is limited. There is usually no income tax relief for donating everyday items although charities may benefit from Gift Aid when selling donated goods under certain schemes.

Donating shares or land to charity can attract tax relief and may also avoid capital gains tax. This is a more complex area and professional advice is usually worthwhile.

For companies donating assets there may be corporation tax relief but VAT and capital gains issues can arise.

Common mistakes I see with charitable donation claims

There are several recurring issues I see when reviewing tax returns.

People claiming charitable donations as business expenses when they are not allowable.
Higher rate taxpayers failing to claim additional Gift Aid relief.
Claiming relief where insufficient tax has been paid to cover the Gift Aid claim.
Assuming all donations qualify when the charity is not HMRC recognised.

These mistakes are usually made in good faith but they can lead to adjustments later.

What happens if you claim Gift Aid incorrectly?

If you claim Gift Aid but have not paid enough tax HMRC can ask you to repay the difference.

This often surprises people who are on low income or whose tax position changes during the year.

It is your responsibility to ensure you have paid enough income tax or capital gains tax to cover the Gift Aid claimed by the charity.

From experience this issue often arises when people make generous donations during years of low income.

Record keeping and evidence

Good records are important for charitable donations especially if you complete a Self Assessment return.

Keep donation receipts or confirmations.
Keep Gift Aid declarations.
Keep records of payroll giving contributions.

For companies keep board approval records and payment evidence.

While HMRC does not usually ask for this information upfront it can be requested later.

Charitable donations and inheritance tax

Although not the main focus here it is worth mentioning that charitable donations can also affect inheritance tax.

Gifts to charity are generally exempt from inheritance tax. Leaving at least 10 percent of an estate to charity can also reduce the inheritance tax rate on the rest of the estate.

This is an area where charitable giving and tax planning can align particularly in estate planning.

Practical advice from experience

If you are an individual always use Gift Aid where possible and keep track of your donations.

If you are a higher rate taxpayer make sure you claim the additional relief. It is often overlooked.

If you run a limited company consider charitable donations as part of wider planning but ensure they are structured correctly.

Do not try to force charitable donations through as business expenses if they do not qualify. HMRC is very clear on this.

If you are unsure about a specific donation ask before claiming. Correcting mistakes later is rarely pleasant.

The key takeaway

Charitable donations can be tax efficient but only if they are made and claimed correctly.

From experience most issues arise not because people are trying to do anything wrong but because the rules are not intuitive.

Understanding the difference between personal relief Gift Aid and company deductions makes everything clearer.

If you give to charity regularly it is well worth spending a little time ensuring you are getting the relief you are entitled to and staying on the right side of HMRC at the same time.

For more guidance on related topics, explore our Bedford Accounting Hub, which brings together practical advice for Bedford clients.