Since total income is generally unknown until the tax year has concluded, it’s often too late to make a pension contribution to adjust 2023/24’s adjusted net income. Previously, it was possible to make a pension contribution in the current year for tax relief in the prior year, but that legislation (s641A of the Income and Corporation Taxes Act 1988 (ICTA 1988)) was repealed in April 2006.

However, charitable donations made now can still be treated as if they were made in 2023/24. Doing so not only reduces the adjusted net income for 2023/24 by the charitable donation amount grossed up for basic rate tax but also expands the basic rate tax band by the same amount. Although the tax savings won’t equal the full charitable donation amount, they do provide a meaningful reduction in the overall ‘cost’ to the donor.

Examples

1. Mark incurred a high-income child benefit charge in 2023/24, which could be mitigated by making charitable donations this year. Similarly, Mel received an exceptionally high bonus, resulting in a loss of her personal allowance; she can offset this impact by claiming relief in 2023/24 for a substantial charitable donation she made in July.

2. Peter, a pensioner with relatively low income, faced a capital gains tax (CGT) liability on a buy-to-let property sale. He could benefit by applying some of his regular charitable donations from 2024/25, along with his 2023/24 charitable donations, to widen his 2023/24 basic rate band, potentially reducing his CGT liability.

Key Considerations and Challenges

The legislation allowing a charitable donation made in one tax year to be treated as if made in the previous tax year is found in s426 ITA 2007. Caution is advised when using this provision due to a few potential pitfalls:

1. The election applies to an individual ‘gift’; a single payment to a charity cannot be split between tax years. While this is usually manageable for taxpayers making regular monthly charitable donations, it may pose a challenge for those who donate annually or on an ad hoc basis.

2. According to s426(6) ITA 2007, the election must be made on the original tax return. This means that the intention to make the election and the specific charitable donations it applies to must be identified while preparing the initial return, as amendments cannot be used to claim this benefit.

3. The return, whether filed electronically or on paper, must be submitted by 31 January 2025.

These deadlines can be a logistical challenge in gathering necessary information from client to agent. However, a properly made election can result in substantial tax savings, even for clients with relatively modest incomes.

This election can also be strategically valuable for parents aiming to reduce adjusted net income to £100,000, thereby retaining eligibility for tax-free childcare (per Reg 15 SI 2015/448 Childcare Payments (Eligibility) Regulations 2015).

Even taxpayers outside of self-assessment may find it beneficial to make an election under s426 ITA 2007. For instance, someone required to file a CGT return within 60 days of selling residential property might use this option to expand their basic rate band.

HMRC’s guidance on Getting tax relief sooner if you do not have to send a tax return indicates that this election can sometimes be made without a self-assessment return. Whether this is done by phone or must be in writing will depend on the charitable donation amount.

Maximise Your Tax Efficiency with Charitable Giving

With tax relief on charitable donations, you can make a meaningful difference while enhancing your tax efficiency. However, timing and accuracy are critical to ensuring that your charitable giving yields the most benefit. At Naail & Co Chartered Certified Accountants, our team of tax specialists can guide you through the process, ensuring your donations work as effectively as possible to support both your financial and philanthropic goals.

Get in Touch

Ready to make the most of tax relief on charitable donations? Get in touch or book a free initial consultation with Naail & Co Chartered Certified Accountants today and let us help you achieve greater tax efficiency while making a positive impact.