UK Income Tax & Donations

For any­one donat­ing their in­come, be­ing aware of tax rules and mak­ing proper use of available de­duc­tions can re­sult in sig­nifi­cantly in­creased dona­tions. There are some ex­ist­ing re­sources on US tax rules (e.g. Ben Kuhn’s post), but I hadn’t come across any for UK tax rules yet.

So in the hope of sav­ing some­one else (and fu­ture me!) some time, here’s my cur­rent un­der­stand­ing. If you’d like to share this with oth­ers, there’s a less EA-ori­ented ver­sion of this post on my per­sonal blog. All the calcu­la­tions and charts are in this spread­sheet. There’s also a per­sonal tax calcu­la­tor tab in the spread­sheet.

Note: I’m not an ac­coun­tant, and I’m definitely not qual­ified to give tax ad­vice. Al­most ev­ery­thing here comes from the tax re­lief sec­tion on the gov.uk web­site. Be­fore mak­ing any de­ci­sions, check that what I’ve writ­ten is cor­rect and ap­plies to your situ­a­tion! If you spot any mis­takes, please let me know and I’ll do my best to cor­rect them. Tax thresh­olds and rates here are for 2018/​​2019. Scot­land has differ­ent rates.

Sum­mary:

  • UK char­i­ta­ble dona­tions are fully tax-de­ductible.*

  • Some of the tax re­lief can go to your cho­sen char­ity au­to­mat­i­cally (i.e. ‘Gift Aid’).

  • You might be el­i­gible for ex­tra tax re­lief, which you can claim back by ask­ing HMRC to re­duce your tax bill.

  • Ex­tra tax re­lief can be sig­nifi­cant! Depend­ing on your tax rate, tax re­lief can give you a 1.25x-2.5x dona­tion mul­ti­plier.

  • There’s some flex­i­bil­ity around which tax year you ac­count for dona­tions in. If you’re earn­ing less this year than last year you might be able to sig­nifi­cantly re­duce your tax bill this way!

One key in­come bracket is £100-123.7k. If you’re in this bracket, you’re pay­ing an effec­tive marginal tax rate of 60%! So for ex­am­ple you could make a £20k dona­tion by giv­ing up only £8k.

How UK In­come Tax Works

UK in­come tax is pro­gres­sive, i.e. in­creases with in­come.

Capture

UK in­come tax brack­ets 2018/​2019 (source)

The chart be­low shows what to­tal in­come tax looks like for var­i­ous in­come lev­els, and how that breaks down into the var­i­ous bands. I’ve in­cluded data up to £200k since be­yond that it just goes up lin­early, and if you’re in that band you might con­sider in­vest­ing in proper tax ad­vice!

chart (3).png

In­ter­ac­tive ver­sion of this chart.

A few things you’ll no­tice about the chart:

  • If you earn less than £11.85k per year, you pay no tax.

  • As you go fur­ther to the right from there, you always pay more tax over­all.

  • The top line gen­er­ally gets steeper as you go right, but this isn’t true ev­ery­where.

  • The steep­est part of the chart is be­tween £100k and £123.7k, where you grad­u­ally lose your per­sonal al­lowance.

The steep­ness of that top line rep­re­sents your marginal tax rate—i.e. how much tax you’ll pay on ev­ery ex­tra £1 you earn at that level. This is a use­ful thing to look at, be­cause it af­fects the ‘dona­tion mul­ti­plier’ you’ll get at that level—i.e. how much your cho­sen char­ity will get for ev­ery £1 in net in­come you give up.

Here’s an­other chart which shows that re­la­tion­ship more clearly:

UK Income Tax - Rate & Donation Multiplier

In­ter­ac­tive ver­sion of this chart.

What does this sec­ond chart show? The yel­low line shows the dona­tion mul­ti­plier for £1 at each level:

  • When you earn be­low £11.85k, your dona­tion mul­ti­plier is x1. This makes sense, since there’s no tax to deduct. For ev­ery £1 you give to char­ity, you lose £1.

  • When you earn £11.85k-£46.35k, your dona­tion mul­ti­plier is x1.25. In this bracket your tax de­duc­tion is fully taken care of by Gift Aid, so all you have to do is re­mem­ber to tick that box when you donate and the char­ity gets an ex­tra 25% di­rectly from the gov­ern­ment.

  • In the bracket £46.35k-100k and again from £123.7k-£150k, your dona­tion mul­ti­plier is x1.67. At this point the 25% in Gift Aid doesn’t fully cover your tax de­duc­tion, so you get to claim back some ex­tra tax from HMRC (see be­low for more on how to do this).

  • At £100k-£123.7k, not only are you in the top 0.1% of global earn­ers, but you’ve hit the dona­tion mul­ti­plier sweet spot of x2.5. You can more than dou­ble your money with ev­ery dona­tion! This is be­cause you’d be pay­ing 40% in tax while your per­sonal al­lowance would be re­duced by 50p for ev­ery £1 in­crease in your salary, re­sult­ing in an effec­tive 60% marginal tax rate. Again, you’ll get to claim back a lot of tax on any dona­tions.

  • Beyond £150k—con­grats! You’re com­fortably in the top 0.1% of the global pop­u­la­tion, earn­ing al­most 150x the global av­er­age salary. Not only that, your dona­tion mul­ti­plier is x1.8, so you only give up 55p for ev­ery £1 you give to char­ity. And giv­ing to char­ity can raise your tax-free pen­sion al­lowance.

How to claim tax back

If you’re a ba­sic rate tax­payer (i.e. your to­tal tax­able in­come is up to £46.35k) then you don’t need to worry about claiming tax back—Gift Aid takes care of it.

Beyond that there are three op­tions I’m aware of: Pay­roll Giv­ing, do­ing a tax re­turn, or ask­ing HMRC to change your tax code.

Pay­roll Giv­ing is great, but your em­ployer needs to be set up for it. If they are, then all you need to do is tell your em­ployer your in­tended monthly dona­tion. They’ll take it straight out of your gross salary and give it to your char­ity of choice, with­out any tax be­ing de­ducted.

If you fill in a Self Assess­ment tax re­turn, there’s a sec­tion on char­i­ta­ble dona­tions. Do­ing one isn’t ex­actly fun, but it’s not as difficult as it sounds (and I’ve heard it’s much eas­ier than the US sys­tem!). All your em­ployer’s data will be im­ported already, so you only need to fill in ad­di­tional de­tails on your dona­tions and any other rele­vant sec­tions. If you’re do­ing reg­u­lar dona­tions then the next op­tion is prob­a­bly bet­ter for you, but if you want to be able to do things like op­ti­mis­ing the tax year of your dona­tions then you’ll need to fill in a Self Assess­ment tax re­turn. And if you earn over £100k you’ll have to do one any­way.

Un­til fairly re­cently, I thought those were the only two op­tions. It turns out there’s a third one! If you give reg­u­larly and don’t fancy filling in a tax re­turn, you can just ask HMRC to change your tax code. All you need to do is tell them how much you’re donat­ing ev­ery month, and they’ll change your tax code to in­crease your per­sonal al­lowance—thereby re­duc­ing the amount of tax you’ll pay. I think you can prob­a­bly do this over the phone, but I found their on­line chat func­tion easy enough. (ob­vi­ously always make sure you keep a record of all your dona­tions)

When to claim tax back

There’s a pretty use­ful rule which can al­low you to claim tax back on dona­tions made now as if they were made in the pre­vi­ous tax year (as­sum­ing you’re filling in a Self Assess­ment tax re­turn). This is great if:

  • you’re earn­ing a lot this year, but un­sure on where/​how much you want to donate. You could hold off on donat­ing un­til just be­fore you sub­mit your tax re­turn.

  • you paid a higher marginal tax rate last year than you ex­pect to pay this year, so could in­crease your effec­tive dona­tion by sub­mit­ting it in last year’s tax re­turn.

Why does this work? When you fill in a Self Assess­ment tax re­turn, you do that for the pre­vi­ous tax year (April-April). And you have un­til Jan­uary 31 in the fol­low­ing year to do this (i.e. al­most 10 months af­ter the end of the tax year).

You’re al­lowed to ac­count for dona­tions made in the cur­rent year as if they hap­pened last year. Speci­fi­cally: “you can also claim tax re­lief on dona­tions you make in the cur­rent tax year (up to the date you send your re­turn) if you ei­ther: want tax re­lief sooner, or won’t pay higher rate tax in cur­rent year, but you did in the pre­vi­ous year”.

Other things to consider


* In this post I’ve fo­cused on in­come tax. I haven’t taken into ac­count Na­tional In­surance pay­ments in any of the calcu­la­tions, as these aren’t de­ductible. I also haven’t mod­el­led the im­pact on other things like stu­dent loan re­pay­ments or pen­sion al­lowance in­creases. As for in­come tax, there are some limits to the amount you can claim back, but they’re quite high—“Your dona­tions will qual­ify as long as they’re not more than 4 times what you have paid in tax in that tax year”.