Did you know that you can make donations to save on your tax bill?
- TBA
- Mar 21
- 4 min read
Updated: Mar 31
How charitable donations can help you save on taxes
The United Kingdom has a long-standing tradition of charitable giving, which has not only driven many important innovations but also provided crucial funding for charitable services nationwide. The British royal family, wealthy individuals, and celebrities play a significant role in promoting charitable donations and social welfare.
But did you know? In the United Kingdom, charitable donations are also regarded as an essential tool for wealth planning and tax optimisation. The tax exemptions and incentives available are not just for high-net-worth individuals and corporations but also for ordinary taxpayers.
Today, we will take you through the key tax-free rules for charitable giving in the United Kingdom and how to use these policies effectively in tax planning.
1.The wealthiest 1% in the United Kingdom donate nearly £8 billion annually
Let us start with some recent data.
According to the Charities Aid Foundation (CAF)'s latest Major Donor Giving Report, which analysed the giving behaviour of around 3,000 wealthy individuals in the United Kingdom, researchers estimated the total donations from people with investable assets of at least £1 million.
The report found that in 2023, the wealthiest 1% in the United Kingdom donated nearly £8 billion to charity. High-net-worth individuals contributed around 0.4% of their £2 trillion in investable assets.
For comparison, the general public donated around £13.9 billion, which accounted for 1.6% of their total income. The report also highlighted that those who donate the most tend to be around 63 years old and are twice as likely to have inherited wealth.
This brings us to a key tax planning strategy: the role of charitable giving in Inheritance Tax (IHT) reduction.
2.How is United Kingdom inheritance tax (IHT) calculated?
The United Kingdom imposes Inheritance Tax (IHT) on the estate of deceased individuals. Given its high tax rate, IHT is a crucial consideration in wealth transfer planning. IHT applies to:
All worldwide assets of United Kingdom tax residents, regardless of location
United Kingdom-based assets of non-residents (such as property, bank accounts)
As of 2024, the IHT thresholds are:
Nil-Rate Band (NRB): £325,000 tax-free allowance, with anything above taxed at 40%
Residence Nil-Rate Band (RNRB): An additional £175,000 allowance for direct descendants inheriting a home, bringing the total tax-free threshold to £500,000
Married couples or civil partners can combine their allowances for a total exemption of up to £1 million
However, strategic charitable giving can further reduce or even eliminate inheritance tax liabilities.
3.How can charitable donations reduce inheritance tax?
Full IHT Exemption for Donations
Under United Kingdom tax law, if a will specifies that part or all of the estate is donated to a registered United Kingdom charity, that portion of the estate is completely exempt from IHT and does not count towards the taxable estate.
For example, if an estate is worth £1,000,000 and £200,000 is donated to charity, the taxable amount is reduced to £800,000, lowering the IHT liability.
10% donation rule lowers IHT rate
If at least 10% of the taxable estate (after deducting allowances) is donated to charity, the remaining estate's IHT rate is reduced from 40% to 36%.
4.How to effectively use charitable giving in estate planning
Charitable donations can be structured in different ways:
Charitable bequests: Allocating a fixed sum, specific assets, or a percentage of the estate to a charity in your will
Charitable trusts: Setting up a trust to donate assets gradually during your lifetime or posthumously, providing tax benefits while maintaining control over assets
Other major charitable tax relief schemes
Gift Aid (for individual taxpayers)
Gift Aid is a government scheme allowing charities to claim an extra 25% on donations at no additional cost to the donor. For every £1 donated, the charity receives £1.25.
Basic rate taxpayers (20%): No extra action needed; charities claim the additional 25%
Higher rate (40%) and additional rate (45%) taxpayers: Can claim extra tax relief in their Self-Assessment Tax Return
For example, if a higher-rate taxpayer donates £1,000, the charity receives £1,250 (with Gift Aid), and the donor can claim back £250 or £312.50 in tax relief, effectively lowering their cost of donation.
To use Gift Aid, donors must fill out a Gift Aid form and ensure their donations do not exceed four times their paid tax in that tax year.
Payroll giving (for PAYE employees)
Employees can donate directly from their pre-tax salary via Payroll Giving. Since donations are made before tax is deducted, donors benefit from immediate tax relief.
For example, a 40% taxpayer donates £100 via Payroll Giving. The actual cost to the donor is only £60, but the charity still receives the full £100.
To participate, employers must offer Payroll Giving through an HMRC-approved scheme.
Donating shares, land, or property (for high-net-worth individuals)
Donating assets such as stocks, land, or property to a registered charity qualifies for income tax relief and capital gains tax (CGT) exemption. The main tax benefits include:
Full income tax deduction: The market value of the donated asset is deductible from taxable income
CGT exemption: No Capital Gains Tax applies on appreciated assets
For example, if an individual owns shares worth £50,000, selling them would incur 20% CGT (£10,000 tax). However, donating them avoids CGT and provides a £50,000 income tax deduction.
Corporate donations (for businesses)
Businesses can donate cash, assets, or services to charities and fully deduct the value from taxable profits, reducing Corporation Tax.
For example, with the 2024 corporate tax rate at 25%, a business donating £100,000 can deduct this from taxable profits, saving £25,000 in taxes.
Eligible corporate donations include:
Cash gifts
Products (such as food, medicines, computers)
Employee volunteer hours (while on payroll)
Shares, land, or buildings
Some Advice from TB Accountants
Whether you are an employee, high-net-worth individual, or business owner, charitable donations can significantly reduce your tax burden while supporting good causes.
For personalised tax planning and to maximise your tax relief, we recommend consulting a professional tax accountant.
