Charities and tax - How charities work

The tax system has a number of features to help support charities and encourage charitable giving. Two of the biggest are gift aid and business rates relief.

Gift aid

What’s the reason for gift aid?

The idea behind gift aid is that you shouldn’t pay income tax on money you’re giving to charity because it’s money that is being used for public good. It’s the government’s way of recognising charitable giving as a good thing to do.

In practice, because the government can’t know in advance what money you’re going to donate to charity, it has to ‘give back’ the tax you’ve already paid once you donate it. For standard-rate tax payers, it gives this money directly to the charity. The government gives the equivalent of 25% of your donation to the charity.

In principle, this means that if you want to donate £20 of your money to a charity, you could donate £16 and claim £4 in gift aid. The charity gets a total of £20, £16 directly from you and £4 of your tax back from the government. In practice, most people think of gift aid as a ‘top up’ to what they’re donating.

Gift aid means charities can claim an extra 25p from the government for every £1 you donate to them.

Only people who pay income tax can use gift aid with their donations.

There are special rules for some sorts of donations, but in most cases if you the charity you’re donating to can claim gift aid if you pay income tax. You just need to fill in the gift aid details when you’re donating to make sure the charity gets the extra money.

If you pay higher rate tax, you can claim back the difference between the rate you pay and the basic rate on your donation.

Business rate relief

Charities are eligible for discounted business rates. Charities get an automatic discount of 80% off their business rates. Local councils have discretion over how much of the remaining 20% to charge them.
This is one of the most important tax reliefs for charities. It helps charities to afford a place in the communities they support, whether that’s an office or a community centre or a village hall. Around 90,000 charity premises are eligible for the relief in England.

Charities aren’t alone in getting business rate relief. Small businesses, amateur sports clubs, and businesses in rural areas or enterprise zones are among others which get discounted business rates.