Personal vs. company charity donations. Which is the best route to take?
Posted on 9th May 2019
As most working adults in the UK already know, donations to a registered charity are eligible for an extra 25% on top of the donation in gift aid when the donation is made by a tax-paying individual.
When a company makes a donation, the charity on the receiving end cannot claim gift aid on the amount collected. On the face of it, it would appear that personal charity donations are better than company ones, as the charity benefits from gift aid from the former option, and the cost is no different to you, the contributor.
But that would make for an incredibly short and rather uninspiring blog post – and, of course, as with all ‘this or that’ questions when it comes to tax, the answer is not quite that straightforward (if only!).
So – company vs. personal donations – what other differences are there?
One difference we’ve already touched on is that company donations are not eligible for gift aid. This would mean that in order for the charity to benefit from the extra 25% available to them by claiming gift aid if the donation was made by an individual, this would cost the company an extra 25% on top.
So, for example, when a donation of £1,250 is made to a charity from a tax-paying individual, the charity can claim 25% gift aid on top of that donation (£312.50) which would result in £1,562.50 in the charity’s pocket in total. For the charity to benefit from the same amount from a company, the company would have to make a donation of £1,562.50 for the same result, as the charity cannot claim gift aid from company donations.
The charity donation is treated as a tax-deductible expense, and as such, reduces the company profit before tax is calculated
In the above case this means that the profit would reduce by £237.50; with the current rate of corporation tax at 19%, this means a £237.50 tax saving. Therefore, the net cost of the charity donations to the company is just £1,012.50 in the end, which is only a minimal difference from making a personal donation of the same amount.
You should note that if your company does not have a corporation tax bill for the year in which any donations are made, tax credits on those donations cannot be claimed. If you are worried about your company’s finances, but you still want to support a charity, you should be wary of making company donations. This is because tax deductions are not available for companies that have made charitable donations if they have also suffered a loss. You could ask the charity if they would consider having your company sponsor it rather than an outright donation, as this is still eligible for a tax deduction if applied for correctly. A sponsorship can be a great alternative to an outright donation, because the company will get something in return, such as public endorsement.
Are there any restrictions or exceptions on tax deductions on charity payments?
If your limited company makes a payment to a charity that actually turns out to be a distribution of a company profit – i.e. a dividend payment – you cannot claim any tax relief on this. Your payment to the charity must be a genuine donation.
Similarly, a payment to a charity that is going to be paid back is technically a loan, and this is not eligible for tax relief either. The same goes for any donations that are made on the condition that the charity will purchase a product or service from you in return.
If a charity does give you a small thank-you gift such as tickets to a fundraising event or some merchandise, for example, this is permitted and the donation will still be eligible for tax relief. However, there are limits on the value of the rewards. For donations of up to £100, the cost of the thank-you gift or benefit can be no greater than 25% of the value of the donation.
For donations between £101 and £1,000 the maximum value of the thank-you gift is £25. For any donations of £1,001 or over, gifts and benefits cannot be worth more than 5% of the donation – and this is capped at £2,500.
Can I claim tax relief on equipment or trading stock that I donate to charity?
If you donate something that your company has used but no longer requires, for example a used (but still relatively new) laptop or computer equipment because you have upgraded to newer models, you can claim full capital allowances on this. The same goes for company vehicles, furniture or machinery.
You can also donate trading stock – which can include any item that you would normally sell to a customer – and you can claim tax relief on its value as long as you do not include it as a sales income.
You will have to take VAT into account (if applicable to your company) when making such donations, but if you have donated such items with the intention for the charity to sell, hire or export them, you can apply the zero-rate VAT.
So going back to company vs. personal donations…
As we have established, a personal donation to a registered charity is taken out of your taxable income. If you are paying yourself a salary up to the PAYE threshold (currently £12,500) and you use company dividend payments to top up your personal revenue, as long as the combined amount does not take you over the higher rate personal income threshold (up to £150,000), then it does not make a difference whether you make charity donations through your company or personally.
If you pay a higher rate tax on your dividends, or you pay yourself a salary rather than a combination of a low salary and high dividend payments, it is slightly different, and it will almost always work out more tax-efficient for you to make a donation through your limited company – and the charity will still benefit from the full amount of the donation.
We can help you figure out the best method for making charity donations by looking at your personal situation and advising you based on your specific circumstances. While we will say that, in most cases, it is better to make charity donations through your limited company, this is not going to be the same for absolutely everyone. Feel free to book a call or send us an email to discuss in more length.
Nicola J Sorrell -
Founder | Xero Champion | IR35 Expert
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