Apr 08, 2018
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.
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.
UK income tax is progressive, i.e. increases with income.
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!
A few things you'll notice about the chart:
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:
What does this second chart show? The yellow line shows the donation multiplier for £1 at each level:
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)
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:
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".
* 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".