Claiming tax relief on charitable donations

As Christmas approaches, you may be thinking of donating some money to charity from your business - or if you’re already doing this, you may be considering renewing or increasing that annual charitable pledge.

But did you know that you might be able to claim tax relief on that donation? Here’s some useful information to remember if you’re planning to give a charitable gift over the festive season. There are different things to bear in mind depending on what type of business you run, so we’ll take a look at the implications for both sole traders and limited companies.

Charitable donations and tax relief for sole traders

It’s your donation, not the business’s

If you are a sole trader, or in partnership, then a donation to charity wouldn’t count as a day-to-day running cost of your business.

That means that, if you pay the money from your business’s bank account, you would need to record this transaction as “drawings”, or a non-business transaction.

Claiming tax relief

But you may still be able to get tax relief on the donation, so long as you’ve made it under Gift Aid.

When you Gift Aid a donation, the charity can claim some money back from the government. This is the equivalent of basic rate tax on that donation - for example, if you give £10 to a charity under Gift Aid, then the charity will be able to claim an extra £2.50 back from the government.

If you are a higher-rate taxpayer, then you can claim tax relief on the difference between the basic rate tax relief the charity has already claimed, and the higher rate - so for your donation of £10, the charity could claim £2.50, and you would get £2.50 in tax relief, since the higher rate is 40% and the charity has already claimed 20% of that.

To claim this tax relief, you should record the donations in the main section of your tax return.

Keep in mind: have you paid enough tax?

Be aware, though, that when you make your Gift Aid declaration, you are saying that you will have paid enough tax for the tax year to cover the relief that the charity is claiming. If you don’t pay that much tax, then you must make good the charity’s relief to HMRC. For example, if a sole trader earns under the personal allowance of £11,000 in 2016/17 and has no other income, if they make a Gift Aid donation of £100, they would have to pay £25 in tax to HMRC - because that is the amount of relief the charity has claimed.

Charitable donations and tax relief for limited companies

Claiming tax relief

If your business is a limited company, you would normally be able to record any money the company gives to charity as a Payment of Charitable Donations in your accounts, and the company can use these donations to reduce its taxable profit. In other words, the company can claim tax relief on the donations by including them as a day-to-day running cost in its accounts, and therefore pay less corporation tax.

Keep in mind: donations that outweigh profit

Be aware though, that a charitable donation can’t be used to create or increase a company’s loss. Let’s illustrate that with an example.

It is Sample Ltd’s year end date and the company has made a profit of £1,000 in the year to date. Despite this small profit level it has cash reserves, so decides to make a donation of £1,500 to charity.

For tax purposes, the company has made no profit and no loss - because the donation can only be used for tax relief up to the limit of the profit. It can’t be used to create a loss.

If Sample Ltd had made a loss of £500 and decided to make the £1,500 donation, then the loss for tax purposes would still be £500 - not £2,000 - because the donation can’t be used to increase a loss.

Donations over £200 to any single charity must also be disclosed separately in the company’s accounts.

Above all, your accountant can guide you about the specific tax implications of your own charitable donations. If you’re not sure how to deal with money you’ve given to charity in your accounts or on your tax return, speak to your accountant for clarification.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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