Giving money away does not need to involve waste. After all, the more efficiently you give, the more the causes and organisations you care about can benefit. There can also be personal tax advantages too. In this guide, our financial planning team at Vesta Wealth outlines how savers and investors can give tax efficiently in 2021-22.
Payroll giving
Most of us give to charities and causes out of our net salary, which has already been taxed before we received it that month. However, it is possible to make your donation(s) stretch further via payroll giving, if your employer offers it and you are paid under the PAYE system (Pay As You Earn), then you can make gifts to a charity from your gross pay, rather than your net pay. This gives you immediate tax relief at your highest rate of income tax.
Gift Aid
The UK government incentivises gifts to the charitable sector by allowing qualifying organisations to claim tax relief on donations from UK taxpayers. In short, for every £1 you give under this scheme, the government adds 25p in reclaimed tax. As such, giving £100 under the Gift Aid system would increase the donation to £125 – a significant increase. If you are a higher or additional rate taxpayer, you can reclaim the difference from HMRC. You also have the option of deciding whether the tax relief claimed counts towards the current or previous tax year, which could be beneficial if for instance you are a basic rate taxpayer this tax year, but paid higher rate tax in the previous year.
Share & stock giving
For benefactors, this is likely the most generous tax relief on offer to them, since it combines both relief on income tax and capital gains tax (CGT). For UK taxpayers, they can give shares to a charity which qualify for tax relief, equivalent to the shares’ market value on the day that the gift is made (inclusive of other costs such as broker fees). Tax relief can be claimed within the tax year that the gift is bestowed.
As an example, suppose you want to give £1,000 worth of your shares to a registered UK charity. You are a higher rate taxpayer, so making this gift could lower your income tax by up to £400 for that tax year. Moreover, you would not need to pay any CGT on any value increase of the shares since you first purchased them. This could, therefore, be a great way to help mitigate a personal tax bill whilst making a generous donation. However, bear in mind that if the shares have fallen in value, this cannot be used to offset other CGT liabilities.
Reducing inheritance tax
Inheritance tax (IHT) in the UK stands at 40% on the value of assets in your estate which go over the £325,000 tax-free threshold. Without careful planning, this could attract a large IHT bill on an estate upon death. Suppose your estate is worth £800,000 in 2021-22. With your IHT-free threshold taken into account (and assuming no other exemptions/allowances), this would lead to an IHT bill of £190,000.
However, charitable giving from your estate can be a great way to contribute to a good cause whilst also saving on IHT. In 2021-22, provided at least 10% of your estate is left to one or more qualifying charities, this reduces the IHT rate on the rest of your estate from 40% to 36%. Let’s take another example to see the power of this niche tax benefit in action. Suppose your estate is again worth £800,000. After your IHT-free allowance is taken into account, this leaves £475,000 subject to IHT at 40%. However, if you left 10% of this amount to your favourite charities – i.e. £47,500, the remaining £427,500 would then be subject to a 36% tax rate, leading to an IHT bill of £153,900. This is a huge reduction compared to the £190,000 bill cited in the first example, above, where charitable giving was not involved in the estate plan.
Considerations when giving
Of course, giving to noble causes is not simply about saving yourself some money on tax, but it is important to consider how much is received by the person or charity receiving the donation. Through prudent financial planning you should be in a stronger position to give more, later in your life. After all, the greater your wealth is, the more potential you have to make a larger donation or gift when you are older. It also gives you more financial freedom, breathing space and peace of mind in the meantime. So, why not save on tax as you seek to give?
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.