Giving to charity is good – and saves on tax!

Giving to Charity and supporting charities, particular home based charities, is so much more in the public domain now, at least compared to my childhood when charity meant the Lenten box for Africa.

Fortunately, the tax system supports us giving to charity. But in some instances, you receive the tax refund and in others it’s the charity. Let’s see how it works.

Paye Only Individual

When a Paye taxpayer makes a donation out of their net salary to an eligible charity, the charity receives the net amount but can then make a claim from the Revenue in order to claim any tax foregone by the donor. This may be better illustrated as follows:

Individual gets paid €500 gross salary.
If earnings are taxed at marginal rate 41%, they pay €205 tax and leaving a net salary of €295, ignoring PRSI and universal social charge.
A donation of €295 is made to charity, as this is the individuals take home salary.
Paye individual completes a Form CHY2 form and sends it to the charity along with donation.
The charity submit the CHY2 Form to revenue and get the €205 tax, therefore the cost of €295 to the individual and the charity receives €500.

This example uses the marginal rate but standard rate may apply depending on individuals circumstances. Also in the situation where insufficient tax was paid the refund given to the charity by Revenue would be limited to amount of tax paid by the donor.

But the really important point here, is that if you contribute to a charity, fill in the CHY2 form (Found here) and send it in to the charity so they can get the tax relief.

Self – Assessed Individuals

Relief can be claimed by self employed individuals when they are completing their tax return for the year in question. The above treatment does not apply and the charity does not receive any repayment from Revenue. This can be illustrated as follows:

Self Assessed Individual donates €500.
The individual receives tax relief on that €500 of €205 if they are taxed at the marginal rate – 41%. Therefore final cost to the tax payer is €295 and the charity has received €500.

This example uses the marginal rate but standard rate may apply depending on individuals circumstances

Corporate Donations

A company donates €500. Relief will be given at prevailing corporation tax rates currently 12.5%. The charity receives €500 and the company receives tax relief of 62.50. Therefore the cost to the company is €437.50 and the charity receives €500. This is claimed as a deductible expense when preparing annual accounts and corporation tax returns.

Restrictions

Since 2003 an upper limit has been placed on the level of tax relief which may be claimed in a single tax year where it is deemed that the individual is associated with the approved charity. Where a individual is deemed associated tax relief is restricted to 10% of the total income of the individual for the year of assessment. An individual is deemed associated with the eligible charity/approved body if they are deemed an employee or a member or of an associated approved body. Two approved bodies are deemed associated with each other if the same person or a group of persons has control over or can direct the activities of both approved bodies.

It should also be noted that apart from the associated restriction on relief, Finance Act 2006 also placed restrictions on the amount of relief granted to a High Income Earner regardless of association. High Income Earners restriction was put in place to provide a limit on the use of relief’s high Earners can use to shelter there income from tax. This means that relief’s are restricted so that a high earner will still have to pay an effective tax rate of 30% with effect from 1 January 2010. It was previously 20%.

The inevitable plug..

As it happens, my sister is raising money for pieta house – feel free to donate at mycharity.ie. And if you are fundraising for charity, let us know through the comments!