Taxable income over £100k? Additional opportunities for tax-efficient giving

As a 40% (higher rate) or 45% (additional rate) taxpayer, you can personally reclaim the difference between the basic rate Gift Aid a charity reclaims on your donations and the higher/additional rate tax you pay.  

This amounts to 25p or 31.25p for every £1 you’ve given. See here for more information on how to claim your relief. If you’re a Scottish taxpayer, the personal reclaim can reach 35p per £1 you’ve given.

With income over £100k, there are even more opportunities to boost your charitable giving tax-efficiently.

Restore your Personal Allowance and boost your gift with 60% relief

You don’t have to pay tax on the first £12,570 of your income, known as your ‘Personal Allowance’. However, for every £2 of income you receive above £100,000, your Personal Allowance goes down by £1.  This means that your effective marginal rate of tax on income between £100,000 and £125,140 is 60% rather than 40% and your Personal Allowance is zero if your income is £125,140 or above.

But what has this got to do with charitable giving?

Your entitlement to Personal Allowance is based on your ‘adjusted net income’.  This means your taxable income less reliefs such as certain pension contributions, gifts of qualifying shares or property to charity and the amount of Gift Aid donations you’ve made in the year grossed up by the basic rate of income tax.  For every £1 you give under Gift Aid, your adjusted net income is reduced by £1.25.

So, if you make Gift Aid donations which reduce your adjusted net income to below £125,140, you will restore a proportion of your Personal Allowance and avoid paying the effective 60% marginal rate on this slice of your income.

Example 1:

Ruth earns £125,140. Ruth gives £20,112 to Stewardship. Stewardship reclaims basic rate Gift Aid of £5,028 so that Ruth’s gift is boosted to £25,140.

Ruth can personally reclaim higher rate Gift Aid relief of £5,028, the difference between the basic rate tax Stewardship reclaimed and the higher rate tax Ruth paid.

Ruth’s adjusted income is now £125,140 - £25,140 = £100k, so Ruth’s Personal Allowance is fully restored. She achieves further tax relief of £5,028 (40% of her restored Personal Allowance of £12,570).

Stewardship receives £25,140, whilst the cost to Ruth is just £10,056 (£20,112 gift - £5,028 higher rate relief - £5,028 relief from restored Personal Allowance).

Maximise your pension savings

An individual can usually save up to £60,000 per year into a pension scheme.  Any contributions above this limit may trigger an income tax charge. However, if your ‘adjusted income’ (largely your taxable income plus any employer pension contributions) exceeds £260,000, your annual allowance will be tapered by £1 for every £2 of excess income, down to a minimum annual allowance of £10,000 if your adjusted income is £360,000 or more.  For full details, see the HMRC guidance.

How does this interact with your charitable giving?

Unfortunately, Gift Aided donations do not reduce your adjusted income for these purposes. So making cash gifts to charity will not restore your pensions annual allowance.

However, there are two types of charitable giving which do reduce your adjusted income and so could potentially restore your pensions annual allowance:

1. Gifts of shares or property – Stewardship can facilitate gifts of listed shares or UK real property in support of your favourite cause.  These gifts are free of capital gains tax and the market value of the gifted assets can be deducted from your taxable income, achieving full income tax relief at your marginal rate.
2. Payroll giving – If your employer offers a payroll giving scheme, your giving can be deducted from your pay before tax, so that you receive full income tax relief at your marginal rate.  Your employer might even offer to match your giving.  Stewardship is registered with the major payroll giving agencies and so you can have your payroll gift added to your Stewardship balance.

If you’re able to make a gift of shares/property or payroll gift, you can reduce your adjusted income and restore your pensions annual allowance so that you can save more into your pension without an income tax charge.

Example 2:

David has an adjusted income of £360,000, so can only save £10,000 into his pension this year. David gives listed shares worth £100,000 to Stewardship.  David can deduct the market value of the shares from his taxable income, achieving income tax relief of £45,000 (45% of £100,000).  In addition, David’s gift will bring his adjusted income down to £260,000, so he will be able to save the maximum amount of £60,000 into his pension this year.

Get help with the costs of childcare

There are various schemes to help with the costs of childcare in different parts of the UK. 

Some of these schemes have an upper earnings limit.  For example, if either parent has an expected adjusted net income of over £100k, the family is not eligible for the UK Tax-Free Childcare scheme or the English free 15/30 hours scheme for working families.

As explained above, ‘adjusted net income’ means your taxable income less certain reliefs including Gift Aid.  For every £1 you give under Gift Aid, your adjusted net income is reduced by £1.25. So your giving can bring you under the income limit to get help with the costs of childcare.

If your giving brings your adjusted net income below £80k, you may also be able to restore your entitlement to Child Benefit.

So if you’re a parent earning more than £100k, you might find that the effective cost of giving is less than you think.

Example 3:

Monica is a single parent with a 3-year old child and she has a salary of £110k. Monica makes an £8k donation to Stewardship with Gift Aid.  Stewardship reclaims basic rate tax of £2k, boosting the gift to £10k.  Monica claims higher rate Gift Aid relief of £2k and also benefits from £2k of 40% relief on the restoration of £5k of her Personal Allowance (see above).  Monica’s gift of £10k effectively costs her £4k.

In addition, as Monica’s adjusted net income no longer exceeds £100k, she will be able to claim Tax-Free Childcare worth up to £2k and (if in England) 30 hours per week of free childcare, potentially worth thousands of pounds.  So Monica may in fact be financially better off as a result of her giving.

Use a Giving Account to organise all of your giving

The Stewardship Giving Account makes it easy to keep track of all your giving so that you can monitor your charitable gifts and how they impact your tax position.

Open an account

Stewardship may provide general guidance about charitable giving for information purposes only. We do not offer tax, legal or investment advice and you are encouraged to seek advice from a qualified professional on your specific situation.