A query from a client:
“As a limited company with myself only, is there any benefit in making charitable donations directly from the company as opposed to making a personal donation?
“I understand with Gift Aid, the charities can claim back the tax paid from an individual, hence increasing the value of the gift.”
Our reply:
“Its best to answer it with a example. I’m assuming (i) donation of £1,000 net, (ii) your company pays standard Corporation Tax at 21% (iii) and if you make the donation personally then you draw a dividend to cover the cost and I’ll look at the situation of (a) you paying and your being a basic rate tax payer, (b) you paying and your being a higher rate tax payer and (c) your company paying. I’ll then look at (d) your company paying but a larger donation to leave the charity in receipt of the same funds.
“(a) you paying and your being a basic rate tax payer
“You write a cheque to the charity for £1,000. They recover gift aid on this (provided you fill in a from) equal to £250. The charity therefore gets £1,250.
“As a basic rate tax payer there are no further tax implications.
“In summary, charity gets £1,250, cost to you £1,000.
“(b) you paying and your being a higher rate tax payer
“You write a cheque to the charity for £1,000. They recover gift aid on this (provided you fill in a from) equal to £250. The charity therefore gets £1,250.
“As a higher rate tax payer you get tax relief of £250 on the donation. But you have a higher rate tax bill on your dividend of £250. These two balance out.
“In summary, charity gets £1,250, cost to you £1,000.
“(c) your company makes the donation
“The company pays £1,000 to the charity. The charity gets no additional tax reclaim on this.
“Your company gets 21% Corporation Tax relief on the payment, £210.
“In summary, charity gets £1,000, cost to your company £790.
“(d) your company makes the donation but makes a £1,250 donation to the charity gets the same as (a) or (b)
“The company pays £1,250 to the charity. The charity gets no additional tax reclaim on this.
“Your company gets 21% Corporation Tax relief on the payment, £262.
“In summary, charity gets £1,250, cost to your company £987.
“Thus, by £13, assuming you equalise the payment to the charity, a corporate donation is better than a personal one.”