This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Smith & Pinching in Norwich, Lowestoft and Eaton. The Financial Conduct Authority does not regulate taxation advice, estate planning or inheritance tax planning.
As the Season of Giving draws near many of us are reminded of the benefits of charity. According to psychologists, giving creates happiness in the giver and forges deeper connections with others. It is also “contagious”, encouraging others to be charitable. Yet did you know that giving can also strengthen your financial plan?
This may seem counterintuitive. After all, does giving necessarily involve depriving yourself? Often this is the case. Yet giving can also be used strategically to help you achieve specific financial goals – e.g. lowering a tax bill. Below, our Norwich financial planners show how giving can integrate into a wider financial plan and help you progress towards your objectives.
We hope these insights are helpful to you. If you want to discuss your strategy with us, please get in touch to arrange a no-obligation financial consultation:
Payroll Giving and income tax
Did you know that you can give money to charity directly out of your paycheque (or pension) before tax is paid on it? This is called Payroll Giving or Give As You Earn and it operates via the PAYE system. A concrete benefit of this approach is that it helps to entrench your giving as a monthly habit. Naturally, this is good for the recipient but it also solidifies your perception of giving as a necessary expense rather than an “optional extra”.
Payroll Giving can also help certain individuals mitigate their income tax bill. For instance, suppose you earn a salary just above the Higher Rate threshold – e.g. £55,000. Making total yearly donations of £5,000 to charity via Payroll Giving reduces your taxable income (although it does not affect your National Insurance contributions).
With no earnings now taxed at the Higher Rate, this could help you reduce tax on your savings. This is because, in 2023-24, a Basic Rate taxpayer gets a £1,000 Personal Savings Allowance; a Higher Rate taxpayer only has a £500 tax-free threshold on total annual interest earned outside of an ISA.
Gift Aid and the Personal Allowance
You have likely heard of Gift Aid. This scheme allows a UK taxpayer to donate to registered charities and community amateur sports clubs (CASCs) and the recipient can claim an extra 25p for every £1 given. This is very welcome for the recipient of Gift Aid since it allows them to reclaim the tax that you (the giver) have already paid on your donations.
However, Gift Aid can also be valuable for helping certain taxpayers with their tax plan; in particular, those with earnings between £100,000 and £125,140 per year. Within this bracket, the taxpayer’s tax-free Personal Allowance (£12,570 in 2023-24) is reduced by £1 for every £2 earned above £100,000. In effect, this “taper” system leads to a “60% tax rate” and eliminates the individual’s Personal Allowance once their earnings reach £125,140.
Making Gift Aid donations, however, the taxpayer can reinstate their Personal Allowance. After you make your declaration of Gift Aid, your basic and higher rate tax bands are extended by the gross charitable donation. For instance, if you earn £110,000 in 2023-24 and make a £10,000 Gift Aid declaration then you can recover £5,000 of “lost” Personal Allowance.
Giving and inheritance tax
Inheritance tax (IHT) is typically levied at 40% on the value of a deceased person’s estate once its value exceeds £325,000. There are various ways to prepare your estate plan to mitigate a future IHT bill, such as making lifetime gifts and using the Residence Nil Rate Band (RNRB). Another option is to consider giving to charity out of your estate when you die or during your lifetime.
If you make donations to registered charities, political parties, museums, universities or community amateur sports clubs, then these gifts are exempted from IHT (they do not count towards your £3,000 Annual Exemption). Moreover, if you donate more than 10% of your net estate to charity on your death then your IHT rate lowers from the standard 40% to 36%. In certain cases, following this strategy could leave more wealth for beneficiaries and charities – and less for HMRC.
For instance, suppose John dies and leaves a £700,000 estate. In his will, he stipulated that £40,000 would be left to charity and the rest would go to his son, Peter. After John’s funeral expenses and debts are subtracted (£15,000), the “baseline amount” left is £360,000 (after his tax-free IHT Allowance of £325,000 is factored into the calculations). Once the £40,000 charitable donation is subtracted from the baseline amount, the total IHT liability is £115,200 (£320,000 x 36%) and £529,800 is left for Peter.
Imagine, however, that John had only made a £35,000 donation to charity (less than 10% of the baseline amount). Here, the charity would naturally receive less and the total IHT bill would be £130,000. Peter would receive £520,000. In short, everyone is worse off except the tax man! Therefore, consider seeking financial advice if you are interested in exploring how charitable giving could be integrated into your estate plan.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense: