In today's episode, we explore tax-effective giving strategies for supporting charities in the United Kingdom. We'll delve into various methods individuals can employ to make donations while minimizing tax liabilities and maximizing benefits for both themselves and the charities they support.

Exploring Tax-Effective Giving Methods

Gift Aid

Gift Aid, as discussed in a previous episode, allows donors to increase the value of their contributions to charities by enabling the charity to reclaim tax on the donation. By participating in Gift Aid, donors can amplify the impact of their generosity while receiving tax benefits.

Payroll Giving

Payroll Giving is a powerful method where individuals donate regularly through their wages or salaries, ensuring a consistent income stream for charities. Notably, it significantly reduces the donor's personal tax liability, making each donation more impactful. For instance, basic-rate taxpayers can witness reduced costs due to tax relief. Moreover, individuals have the flexibility to choose from 23 listed agencies with HMRC, facilitating easy administration and allowing them to designate specific charities or groups of charities for their contributions. Understanding your tax bracket and the associated tax rates is vital in maximizing the tax-saving benefits of payroll giving and optimizing your support for charitable causes. For detailed information on Income Tax rates and Personal Allowances, you can visit here.

Donation of Assets

Donating assets such as land, property, or shares can also yield tax benefits. By gifting these assets to charities, individuals can claim income tax relief and capital gains tax exemptions. This not only reduces taxable income but also ensures that charities receive valuable support without incurring tax liabilities.

Inheritance Tax Relief

Planning ahead for charitable giving through a will can significantly reduce inheritance tax liabilities. By bequeathing assets to charities, individuals can not only avoid inheritance tax on those assets but also benefit from a reduced tax rate if more than 10% of the estate is donated to charity.

Conclusion

In conclusion, tax-effective giving offers a win-win solution for both donors and charities. By utilizing strategies such as Gift Aid, Payroll Giving, donation of assets, and inheritance tax relief, individuals can maximize the impact of their contributions while minimizing their tax exposure. Let's continue to support charities in their valuable work by making tax-effective donations.

We hope you found this episode informative and insightful. Until next time, happy giving!

Tax effective giving is where you make a donation to a charity, minimise and reduce your own tax exposure, your own tax liability, nothing wrong with that, and also maximise the income, maximise the return for a charity.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Typically, there are four main ways in the United Kingdom where tax-effective giving takes place. Last week, we talked about Gift Aid. That was number one. And then followed up, we've got payroll giving the gift of land, property, or shares, or that moment when you pass away and you donate assets via your will

to a charity and has the impact of giving charity much-needed funds as well as reducing your inheritance tax liability as a result. Now, folks, before we dive into those methods, before we look at each one individually, it's worth pointing out. And when you think charity, let's flip it on its head. There are many wonderful organisations out there in the creative field, in the health field, education, community cohesion…

We have hundreds of thousands of charities out there doing good work, which need much fund. So think of it as supporting businesses that do good work not only on a domestic scale but also on an international horizon as well across lots of different sectors, and making gifts supplying funds to those organisations is a vital thing for them to not only sustain but thrive and carry on delivering that benefit. Let's get back to our mechanisms. Now in last week's episode

I talked about gift aids worthwhile revisiting that podcast, check it out. The second method I'm going to do is called payroll giving, now as the name implies this is where you donate regularly through your wages or salaries that can also apply by the way to private pensions. Now, the benefit of making the gift that way is that

A, the charities get regular income. Secondly, it has the impact of reducing your own personal tax liability. I'll demonstrate with a few numbers in a moment. And also, the company, the employer, can discharge their corporate social responsibility. They can also do good things for a charity which is of a local charity or a national charity.

So pretty much everybody who takes part in payroll giving benefits in some way. Let's throw some numbers in your direction. Now before we throw those numbers here, consider your own individual situation. Are you what's called a basic rate taxpayer, where effectively you're paying tax at the 20 percent rate?

Are you a higher rate taxpayer, where you're paying at 20 percent and also you've got income that's being taxed at 40 percent? Or are you an additional rate taxpayer, where on top of the 40 percent rate, you're paying a 45 percent rate as well? The tax saving will increase the higher the rate of tax that you're paying.

The charity receives the same level of money from you. So if you donate 100 pounds and you're a basic rate taxpayer, effectively that regular donation, that money that's going through your payroll, will only cost you 80 pounds. You get 20 pounds knocked off your tax liability, which can't be a bad thing. For that same 100 pounds, it's a 60 pounds effective cost.

You're reducing your tax bill by 40 pounds for every hundred. The charity receives their 100 pounds. And lastly, if you're an additional rate payer, 55 pounds is the effective cost of that payroll giving. Now the mechanism as such, typically you have an outside agency that will collect those contributions from your employer. You, as the employee can decide which charity is the recipient of that regular payment that you're making, and I say regular, by the way, because most people who engage in a payroll giving scheme will be doing it on a regular basis.

You can do it as a one-off. Now, there are 23 listed agencies with HMRC, by the way, who operate and offer that service as payroll agencies. They administer those contributions. You can decide to give to a specific charity, or you and your fellow colleagues may get together and decide that you want to change the recipients there as well.

So you have that flexibility to either designate individual charities or a group of charities. It's your choice. Your firm may have a charity they're actually sponsoring and supporting, which does good work in the locality, or again it may be a national charity itself. Now the rates do differ, by the way, if you live in Scotland, because the tax rates in Scotland are different to the United Kingdom for England and Wales.

So again, the principle is what we're focusing on, the actual mechanics and the numbers, if they're a little bit head-scratching, then drop us a line. Check it out on HMRC and I'll give you the link in the show notes so you can find out who those payroll agencies are, as well as what the rates of tax might be.

So that's method number two. So we talked about gift aid last week, we're talking about payroll giving here. Let's talk about the third one now. And this is where you may decide to donate land, property, or shares to a charity of your choice. Remember, when I say charity, effectively, it's the organisation that's doing good stuff.

Whether it's in the arts and creative sector, whether it's in the field of education, whether it's in the field of community cohesion, international outreach work, relieving poverty, there's a whole list. Now that charity, if it's the recipient on donations of land, property, or shares, when you make that gift, and no money is received, then there's no tax liability.

And you can actually claim income tax relief by deducting the value of that donation from your taxable income. That has the effect of reducing your taxable income and thereby reducing your tax liability as well. If you also gift those assets to a charity, they're made what are called Capital Gains Tax Free or CGT Free.

Now in most cases, by the way, charities would prefer the individual to take care of that burden and make those sales themselves. So, liquidate those assets, generate the cash, and then make the gift accordingly. As long as you've got the records from the charity and yourself, you can still claim the income tax and the capital gains tax relief.

Now, if for any reason you decide to sell those assets and money changes hands in terms of when it goes to the charity, then potentially there's an income tax liability. But most people in that situation will gift those assets, and again, that's going to be beneficial both for income tax and capital gains tax as well.

Now before we look at the last method, and that comes to inheritance tax. So death is going to befall us all at some point in our lives. I want to mention one more point about the payroll giving. Unfortunately, it doesn't relieve any national insurance burdens. It only relieves income tax burdens, which again, can be quite punishing, and if you want to achieve two objectives of giving to a charity, as well as minimising your tax liability and maximising the return for the charity, then it's worthwhile looking at these different mechanisms.

Now, the last one I want to consider is inheritance tax relief. Now, currently the headline rate for inheritance tax is 40 percent, typically chargeable on estates over 325,000. Again, there are a myriad of reliefs and exemptions, family homes, etc. But let's work on that assumption. 40 percent is the headline rate.

Now, two things to bear in mind here: Number one, if in your will you bequeath your assets to a charity? There is no inheritance tax on those assets, so they're gifted IHT free. If, in addition, you give more than 10 percent of your estate to a charity, you leave that in your will, then the rate of inheritance tax drops from 40 percent to a lower 36%.

You've got to give it I said, at least 10 percent on the value of your estate for that to be considered. And again, depending on the magnitude of your estate, a 4 percent IHT saving has got to be worth considering. Again, this has to be executed via a will. And again, the choice is yours about which charities you select.

As long as they're registered in England, Wales, Scotland, Northern Ireland, it will all count. So, folks, I hope you found this useful. Let's just summarise where we are. If you're going to give to a charity and you also want to minimise your own tax liability, and who wouldn't want to, and you also want to maximise the return for a charity, which is essentially a business registered as a charity, then you've got Gift Aid, check out last week's notes and podcast, you've got payroll giving, you've got gifting

land property or shares and then you've got leaving gifts in your will to a charity of your choice. I hope you found this useful. Are you somebody who donates to a charity? If so, I'd like to hear your thoughts on this. Have you found them useful? If you're a charity itself, consider those different mechanisms and make sure that you communicate the benefits out to your donors.

Again, donors won't typically be taking on board tax reliefs when they make those gifts, but they can certainly be an influencing element. Until next time, folks, happy donations. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.