Capital has taken a closer look at what people need to consider before giving to charity. This is a guide to help your charitable giving achieve the greatest effect, whilst being financially and tax efficient for you.
Almost every day you are bombarded with messages asking you to give to charity in some form or another; from the tills at your local supermarket, to the adverts on your TV, and your friends sharing their crowdfunding pages on Facebook.
Most of us have a desire to give back and help others less fortunate. It is hard to know which of the 185,000 registered charities to choose and which one will have the greatest effect.
How do you choose a cause to support?
Passion should be the fuel for your charitable giving. You want to put your time and money into a cause that you care about. Before dipping your hand into your pocket, you should think about what you really want to achieve from giving to charity and what motivates you.
While helping a good cause is the primary aim of giving, a positive side effect is the warm fuzzy feeling you get when you help others. It is scientifically proven that giving can help increase your happiness. This is especially true when you choose to give to a cause that you are passionate about.
Prioritising all the causes you want to support can be a challenge. If building wells in Africa, researching cures for cancer, and helping shelter homeless people are all on your agenda, do you have enough time or money to help them all? If not, how do you decide between them?
Curiosity.com suggests that you should consider the following questions when you are deciding on a cause:
- Scale: How big is the problem? How many lives does it affect? If we solved it today, how much would that benefit the world?
- Solvability: How easy is it to solve the problem? Do solutions already exist and, if so, how strong is the evidence behind them?
- Neglectedness: How many resources are already devoted to this problem? How many people know about it? Are there good reasons why it hasn’t been solved yet?
Giving becomes a lot more rewarding when it reflects your beliefs and when you can evidence what is being achieved. Like any life goals, having a plan and goal in mind will help you to achieve the greatest impact. Create a personal mission that reflects your beliefs, so you can strategise your charitable giving.
How to decide which charity to support?
So, you’ve decided your personal mission and your cause. Now you must decide which charity to support.
You want your hard-earned money to be donated to a good ethical charity. You will need evidence that they are working hard for every pound and getting impactful results. To find this out you need to do some research and compare charities that support your cause:
- What do they use the money for?
- How much of the money goes to helping the actual cause?
- What are the results of their work?
- Do they have a skilled trustee board?
- Are they registered?
- Are they eligible for Gift Aid?
Do you have spare time, spare money, or both?
The big question is, are you time poor and money rich or time rich and money poor?
Do you have a valuable skill, contacts or experience the charity or cause could use? This can sometimes be far more valuable than your money and have greater impact.
Giving time doesn’t have to mean partaking in an organisation’s regular volunteering programme. It could involve contributing professional, legal, marketing or financial expertise; mentoring the charity’s staff, fundraising through your network, or becoming a trustee or ambassador.
New retirees can sometimes feel a loss of purpose and community. Donating time to a cause can be a fantastic way of filling that void.
For busy workers with family commitments, donating your time may be a stretch. Focus on creating a giving strategy that can be achieved by your money alone.
Another way to support a charity is through gifting assets. If you have a property, item(s), or shares you could gift to a charity, this can be a fantastic way of supporting the charity and can be tax efficient.
If you have a large social network and are considered an influencer, endorsing the charity publicly can be an invaluable way of generating donations. This can be done through social media or at events.
Build your charitable giving into your financial life plan
If you plan to give money to charity it is beneficial to build this into your financial planning. Giving to charity can in fact help reduce your income tax. Here are a few ways to generate financial wins for both you and the charity:
If a charity is eligible for Gift Aid and you are a UK taxpayer (through income, pension or capital gains), the charity can receive 20% from the government on top of your donation. For example, if you donated £100, the charity will receive £125. Higher rate taxpayers can also reclaim 20% of the gross donation (or 25% for additional rate taxpayers taxed at 45%). This means that a higher rate taxpayer can claim back £25 on the £100 donation, the government pays £50, and the charity receives £125. Alternatively, you can nominate a charity to receive your reclaimed tax. Visit gov.uk to check you are paying enough tax to benefit from Gift Aid.
Being smart about your charitable giving can mean Gift Aid could help with:
- Avoiding higher rate tax by increasing your basic rate tax band.
- Recovering your personal allowance from the 60% effective tax rate falling on earnings between £100,000 and £123,700.
- Removing you from the additional (45%) tax band.
Gifting assets to a charity
As mentioned earlier, you can donate assets such as shares or property to charity. You can claim tax relief from income tax for the full market value of shares and securities, and freehold and leasehold UK properties given to charities. So, if you gift shares worth £5,000, you will be entitled to deduct £5,000 from your taxable income when working out your tax bill. This is especially beneficial for higher rate taxpayers because the relief is granted at the rate(s) at which you pay tax. In this example if the donor had at least £5,000 of income in the higher rate tax band they would save £2,000 of tax (40% x £5,000).
If you make a gift of shares or other assets you don’t pay capital gains tax on these. You must obtain confirmation from the charity that you made this gift.
You may want to consider leaving a charitable donation in your will to causes close to your heart. These donations could be anything from cash to properties, land, or specific items. These charitable donations are exempt from IHT and if you donate at least 10% of your net estate to charity the rate of inheritance tax payable on the rest of your taxable estate drops from 40% to 36%.
Need any help?
Your Capital financial planner can help you to create a charitable giving strategy. They will ensure the strategy is both tax efficient for you and impactful for your chosen charity, as well as identifying how much you can afford to donate. Contact Capital today to discuss getting started on your charitable giving strategy.
Supporting a cause, whichever way you choose, can be an incredibly rewarding and fulfilling experience. Having the power to make a difference is a great privilege, and one that comes with its own sense of obligation. Acting on this responsibility reinforces your own values and helps you to feel like you’re living in a way that is true to your own ethical beliefs.
Studies have shown that supporting a charity can increase your happiness. So, as well as helping a good cause, you are also improving your own life.
At Capital, we believe giving is not about making a donation, it is about making a difference.
The Financial Conduct Authority does not regulate tax planning, nor does it regulate will writing.