Business owners make charitable donations as a way to reduce their tax bill, whilst contributing to their charity of choice. Terms and conditions apply though so it is important to understand the tax rules and regulations before making your donation, to ensure you maximise your tax position. Find out about how it works for sole traders and limited companies.
Making donations to a charity or CASC
First of all, to make a donation that is allowable for claiming tax relief, the charity, or community amateur sports club (CASC), must be registered. It is also essential that you keep evidence of your transaction, as this will be needed for your tax return.
Most business owners choose to donate cash, however if you are planning to donate shares, property, equipment or land then this becomes more complex and bespoke tax advice would most definitely be required.
Cash donations for sole traders
Sole traders regularly use donations as part of their tax planning.
It is always important to claim Gift Aid on your donations as this gives the charity an added boost of 25p per £1 donated. It doesn’t affect your own cost at all though so it is definitely worth doing. As long as the donation is not more than four times your annual tax bill, then you should be able to claim Gift Aid.
Higher rate taxpayers are entitled to claim an additional 20% in tax relief, the difference between basic rate and higher rate tax.
For example, if you donated £100, then your total donation would be £125 with the Gift Aid added. The 20% allowable to you for tax relief would equal £25.
The same calculation applies for top-rate taxpayers, who are able to claim 25% tax relief, which would equal £31.25 on a £100 donation.
As an added bonus, it is possible to track back over four years’ worth of donations, so if you are a new business owner then this may be a way to reduce your tax bill.
Speak to an accountant to make sure you have everything correctly accounted for.
Cash donations for limited companies
If you have a limited company it is possible to make donations through your company account. It works in a different way though as the corporation tax is reduced by the amount of the donation.
Terms and conditions do apply if you receive something in exchange for the donation, as a corporate benefit; this could be tickets, advertising or merchandise.
Working with an accountant can ensure you are maximising your tax relief both for your business and as an individual.