The most valuable charitable donation you can make

26 March 2024

Those with earnings between £100,000 and £125,140 pay an effective income tax rate that sits amongst the highest in the world. Taken together with National Insurance contributions (NICs), the effective tax rate in the 2023/24 tax year on this portion of income can be as high as 62% and even slightly higher in Scotland at 63%.

As well as being subject to an unusually high tax rate compared to the tax rates that apply to other bands of income, those with income over £100,000 could also see the loss of valuable free childcare hours worth thousands of pounds and the tax-free childcare account. 

With the tax year end of 5 April 2024 fast approaching, those with an income close to the £100,000 threshold still have some options available to them in the remaining days of the tax year to avoid stepping through this tax trapdoor.

In determining whether someone has an income of £100,000, it is necessary to calculate their ‘adjusted net income’. This isn’t simply the total of someone’s income from different sources and some deductions can be made when calculating it.

Specifically, someone’s ‘adjusted net income’ is their total income, disregarding income covered by the personal allowance, less deductions for certain payments on which tax reliefs are available. Those payments include donations made to charities and contributions made personally to a pension.

Take, for example, a parent of a three-year-old living in England who had a £3,000 pay rise at the start of the 2023/24 tax year taking their salary for the year to £103,000. They will suffer income tax and NICs at an effective rate of 62% on the £3,000 over £100,000, leaving them with a net income from that portion of income of £1,140. But they have also lost the benefit of 30 hours free childcare which could be worth around £7,000 a year depending on the childcare provider. Just taking that into account, they would be £5,860 worse off. Those with multiple children under four can multiply the loss as well.

In this scenario, someone could make a charitable donation or pension contribution to reduce their ‘adjusted net income’ below the £100,000 threshold. In the case of a charitable donation, it would need to be a donation of at least £2,400 which would then be ‘grossed up’ for tax purposes and treated as a £3,000 deduction in the ‘adjusted net income’ calculation. Turning to the example again, after making that £2,400 donation they could end up £5,740 better off compared to if they had remained on a salary of £100,000.

A charitable donation does not even need to be made before the end of the tax year on 5 April 2024. It can still potentially be made by 31 January 2025 at the latest or by the date the individual’s tax return for 2023/24 is submitted if that is earlier.

So, there is no need to rush with a charitable donation as there may be with a pension contribution ahead of the tax year end deadline. You do not even necessarily need to decide which charity should benefit at this stage as there are charities which can allow you to make a donation and then later decide how and when this should be used.

One further point to note is that certain tax reliefs claimed cannot be deducted from income when calculating your ‘adjusted net income’ for the purposes of establishing whether the £100,000 limit is exceeded. An example of this is a payment to a trade union.

Until action is taken to remove these punitive tax rates in the tax system, many will be caught out when simple steps could be taken to ultimately leave themselves, and potentially others, better off.