11.5.2021 | Tax

Payroll Giving and charitable donations

Andrew Diver of the Beatons Group gives an overview of payroll giving and how to manage charitable donations within your business.

Giving to charity can deliver the feel-good factor to your business and contribute to a positive working environment by giving employees the opportunity to donate to their chosen charities.

Supporting charities also helps your business develop meaningful connections and an understanding of the communities in which you operate.

And it’s good to know that charitable contributions from businesses to non-profits can qualify for tax deductions too.

Inevitably there is some admin related to recording charitable giving, so it’s a good idea to consult a tax expert if you’re not sure. Beatons are always happy to advise.

Payroll giving
Company owners and directors should be aware of their Community Social Responsibility (CSR). This is the part in which their business plays in the wider community and the responsibilities that it has to that community.

Setting up a payroll giving scheme can be part of a company’s CSR strategy, and many employers operate a matching scheme in which they match the level of employee giving.

This is great for fostering employee engagement and a collective responsibility, bringing the company and its people into the community.

How does it work?
Payroll giving is a way of giving money to charity without paying tax on the amount. It is paid through PAYE from wages or a pension.

Usually, employers agree to deduct an amount from an employee’s salary and pay this directly to the charity or any organisation which administers the payments.

Payroll giving means that the full relief is applied via your payroll and provides the full tax deduction saving the charity from having to make the claim to HMRC.

For example:
A gross salary of £1,000 would be taxed at 20% and result in £200 in tax and £800 net pay.

If an employee was to make a £100 donation as above, the £1,000 taxable salary reduces to £900.

When taxed at 20%, this results in a net pay of £720 – This is the original £800 net pay less £80 which is the cost to the employee of the donation as the £100 donation will not have been taxed.

This scheme is particularly useful for higher rate taxpayers as it gives them the extra tax relief on their donations without them having to complete a tax return.

The gift aid scheme
The easiest route to giving cash to a UK registered charity is via the gift aid scheme.

Its merits are described here in an example:
Let’s take an example of a cash donation of £80 to a charity.

If the charity is provided with the donor’s name and postcode and declaration, they are a UK taxpayer and they can contact HMRC and request a further £20 bringing the amount the charity can spend up to £100.

For a taxpayer who earns less than £50,270 a year there is no other tax relief for this.
But for taxpayers earning over £50,270 they can obtain higher rate tax relief through their tax return.

For the £80 they have spent this is increased to the £100 as detailed above. This means they have been given £20 tax relief already but because they pay tax at 40%, they can receive a further £20 reduction in their tax liability.

If your income exceeds £50,270 it is worth keeping a note of all the charitable donations you make, from any donations you may make to organisations such as Rotary, Round Table, Masonic Lodges to individuals running marathons supported through Just Giving and other charitable giving sites.

Giving shares, goods and land
Generally, charities like to receive cash, but in some instances, they will receive shares or other assets.

In these instances, there may a decision to be made on whether to sell the shares and gift the cash or to simply gift the shares directly to the charity.

If the sale of the shares gives rise to a capital gain, then it can be more beneficial for the donor to gift the shares directly to the charity. No capital gain tax will be due on the disposal of the shares, and they will be able to deduct the value of their shares from their income for tax purposes. This could be used by business owners who were selling their business and wanted to give a proportion of the net proceeds to charity.

The charity will however not be able to recover any further tax on the value donated.

Giving goods as a taxpayer – when donating goods to charity, this usually means giving items that will be sold, so it is the cash proceeds which is taxed.

Gift aid is usually claimed on this sum and so higher tax relief can be claimed if the donor’s income exceeds £50,270.

If you are giving goods as a company, for example to be added to a truck that is being sent over to Ukraine, the company would need to be officially gifting via a UK or EU registered charity. This would then mean that the value of the goods purchased could be deducted against a taxpayer’s income in the year.

This also means a company can obtain a deduction for the value of goods against its income for corporation tax purposes.

How to claim tax relief on a charitable act via your business
In recent times Beatons has received several enquiries regarding tax relief on sending trucks to support Ukraine.

One question came from a haulage client who was driving a truck to Poland which would be full of donated goods. This client wanted to know if they could obtain tax relief on this trip.

Beatons advised that they would receive corporation tax relief on the cost of the job. This is because they were providing the goods to a registered charity in an EU country. The company would list the job like any other shipment but would record no revenue for it meaning the job would make a loss and therefore the company income liable to tax reduces by the costs involved.

If the shipment had been carried out independent of a registered charity, then no relief would have been able to be claimed and the costs would have been disallowed as they would not have been wholly and exclusively for the purposes of the company.

Beatons can advise on any tax queries related to charitable giving. You can contact them on 01473 695777 or info@beatons.co.uk