Giving your bonus to charity – the tax benefits of philanthropy

The philanthropy of high profile sporting and business people often hits the press, most recently with Real Madrid superstar Cristiano Ronaldo donating his Champions League win bonus to charity.  Now hailed as “the most charitable athlete in the world”, Ronaldo’s donation of £456,000 is undoubtedly philanthropic, but pales in comparison to the annual earnings of the highest paid athlete in the world.  With an annual income of $50 million, one could argue that he can afford to be generous with both his winnings and his celebrity endorsement to a charity.

Others in the business world have also made headlines for donating their bonuses to charity including the head of telecom giant Talk Talk. Baroness Dido Harding gave her £220,000 bonus to an autism charity, and the Chief Executive of the 73% publicly-owned Royal Bank of Scotland, Ross McEwan has reportedly set up a charitable trust that would receive half of his £1m role-based allowance every year, over the next five years.

So why do wealthy individuals give to charity? Apart from philanthropy, giving to charity can help reduce a tax bill from both an income tax and Inheritance Tax (IHT) perspectives.

 

Personal Tax

When an individual donates to a charity, the net amount is “grossed up” by HM Revenue and Customs (HMRC).  Therefore if an individual gifts a donation of £80 after tax income to a charity, the charity can claim a further £20 from HMRC making the total amount received by the charity £100.  Higher rate and additional rate taxpayers will also benefit as the gross donation (i.e. £100) is then used to increase their basic rate band e.g. the amount at which 20% tax is paid. In this example, a further £100 would be taxed at 20% instead of 40% giving a saving of £20.  Therefore, the net cost for a £100 donation to a charity for a higher rate taxpayer is only £60.  (£80 donation less £20 of tax saving).

In addition to the above, where the donor has a yearly income over £100,000 their personal allowance will either be restricted or removed altogether.  Depending on the level of the income, gift aid donations can be used to reinstate part or all of the personal allowance. Although the benefits that arise from making charitable donations depend on the individual’s circumstances making gift aid donations can lead to a welcome reduction of income tax, whilst also supporting a favoured charity.

 

Inheritance Tax

Leaving part or all of an estate to charity can reduce or completely eliminate an IHT liability.  If you leave something to charity in your will, it will not count towards the value of your estate and instead will be deemed as leaving a “charitable legacy”.  Individuals can also cut their Inheritance Tax rate on the rest of an estate by 10% (from 40% to 36%), if they leave at least 10% of their “net estate” to a charity.  However, one word of caution, the rules on how to work out what can be given to charity to lower the IHT rate are not straightforward and speaking to your adviser is recommended.

Given the tax advantages of donating to charity, it is obvious that being philanthropic can not only make a difference in the lives of other but can be key to significantly reducing a tax liability.