What are the current rules around charity tax relief?

Discover the latest rules and regulations around charity tax relief and gift aid in this essential guide.

In support of charitable intentions, the UK government established specific tax relief incentives for charities and donors to encourage the goodwill and generosity of charitable causes.

However, when sums of money are involved, nothing is ever simple.

So, with all UK charities qualifying for certain tax reliefs, how does it work, and can it benefit your organisation?

Whether you’re donating to a charity or you’re a non-profit organisation receiving donations, discover the official rules and regulations for UK charity tax relief in this blog.

Are charities tax-exempt?

In the UK, most charities don’t pay taxes on forms of income, provided they spend the money on charitable intentions. The forms of income included in tax relief for charities include:
  • Donations
  • Profits from trading
  • Rental or investment income (bank interest)
  • On profits when selling or disposing of assets (properties, shares)
  • When you buy property
For charities in the UK to qualify for tax relief, they must hold official recognition by HM Revenue and Customs (HMRC). UK charities can also use HMRC to complete tax returns and claim back any deducted tax.

The types of income UK charities are requested to pay tax on include:
  • Dividends received from UK companies before 6 April 2016
  • Profits from land or property development
  • Certain purchases with specific VAT rules for charities – e.g. gas and electricity
  • Business rates on non-domestic properties (80% discount)
Plus, not forgetting the obvious point that charities must pay tax on any money not used for charitable purchases, known otherwise as “non-charitable expenditure”.

So, charities aren’t entirely exempt from tax but pay significantly reduced amounts compared to other organisations.

How does charity tax relief work?

Whether you’re a charity or a donor, charity tax relief works in tandem for either side. While UK charities receive tax exemptions for being non-profit organisations, those who give to charity can also receive forms of tax relief on their donations.

Donating to charity tax relief

Those who give to charity can receive income tax relief by reducing the asset market value from their income with a tax return. Typically, this amount sits in the region of 20%.

However, higher-rate taxpayers can save up to 40-45%. Donors don’t have to pay tax on any land, property, or shares they donate, with relief granted across Income Tax and Capital Gains Tax. Other tax relief donations can be made payable via Gift Aid, a Payroll Giving scheme or in your will.

Charity Tax Relief

Understanding whether your charity is applicable for tax relief relies on evaluating the income you receive and establishing if it qualifies as tax relief income.

As mentioned, you must first be officially recognised by HMRC to receive tax relief as a charity. This accreditation is awarded officially by the Charity Commission in England and Wales, the Charity Commission for Northern Ireland, or the Scottish Charity Regulator.

Further eligibility includes being officially based in the UK, Norway, Iceland, or Liechtenstein and operating with charitable intentions.

These charitable intentions include:

  • Religion
  • Education
  • Human and animal health and wellbeing
  • Human rights
  • Combating poverty, abuse, or hardship

The various tax reliefs include trading points and other tax exemptions. Charities can also qualify for VAT relief but must provide proof to the supplier through official documentation. Your charity number provided by the Charity Commission is substantial proof of charity status applied to prove VAT exemption.

Charities can reclaim basic tax rates with official UK taxpayer verification and a signed Gift Aid declaration. Typically, a basic reclaim tax rate equates to 25% of the donation. For example, if you donate £100, then the basic tax rate entitlement would be £25. 

What is Gift Aid?

Gift Aid allows UK charities to claim back 25p every time a donor donates £1. To qualify for Gift Aid, you must be a recognised charity or a community amateur sports club (CASC).

However, rules apply to the donor to comply with Gift Aid regulations. For example:

·       The donor must have paid an equal amount or more in Income Tax or Capital Gains Tax within that tax year.

·       The donor must make an official Gift Aid declaration to prove you can claim against it.

Other special rules apply to claiming Gift Aid for tax relief purposes include the following:

·       Donations from sponsored challenges.

·       Charity membership fees or church collections.

·       Selling goods on behalf of individuals.

·       Charity events to view charity property or auctions.

·       When volunteer expenses are donated back to your charity.

·       Donations are raised through charities involved in running schools.

For further information on these special rules and whether they apply to your donation or organisation, here’s a link to the official Government website.

Finally, the next points are where you cannot claim gift aid donations:

·       Funds or donations from limited companies

·       Funds or donations through Payroll Giving

·       Where donors receive a benefit over a specific limit

·       From charity vouchers

·       Any funds or donations you received before your official registration as a charity

Is tax relief classed as income for a charity?

Tax relief should not be classed as income for a charity but serves to relieve tax from the donations the charity receives, providing the money gets spent on charitable purposes.  

Speak to your local tax relief specialists

Hopefully, this guide has helped shed some light on the current rules around tax relief. But if you still have any questions or would like to make your tax affairs even easier, it might be time to speak to an expert.

At Data Developments, we have a proud-35-year history of writing and developing accounting software for various faith organisations, charities and other non-profit organisations 
Our software solutions serve charities with tax relief incentives, easing the administrative process across accounts and donations.

Created by industry experts from various charities, Gift Aid experts and other non-profit institutions, our products serve a range of cloud and desktop devices, allowing you to manage your donations, finances, and subsequent tax relief.

For more information about how our specialist accounting software can manage the tax exemptions of your non-profit organisation, get in touch with our team today