A common not-for-profit query is – do charities pay tax? In short, it depends on whether the income in question is solely for charitable purposes.

Charities are not fully exempt from paying tax, but there are several relief rules in place with the intention of maximising the value of their work.

For the tax year 2022-2023, tax relief for charities and their donors was almost £6.0bn, up 8% year-on-year, according to government statistics.

That includes:

  • £2.4 billion relief of business rates
  • £1.6 billion in Gift Aid paid to charities at the basic income tax rate
  • £740 million in Gift Aid paid at the higher rate
  • £790 million inheritance tax relief

Read on for our charity tax relief guide, including information about how Gift Aid works for donors in the UK. We’ll explain the rules around charity donations tax relief.

Charity tax relief

As mentioned, charities do not pay tax on most forms of income if they are using those specific funds for charitable purposes. This is called charitable expenditure.

They can also claim back tax already deducted, for example on Gift Aid donations and bank interest.

This includes tax on donations, profits from trading, rental or investment income, profits when selling or disposing of property or shares – and buying property.

There are different tax relief rules for community amateur sports clubs.

Do charities pay corporation tax?

In general, charities are exempt from paying corporation tax in the UK. However, there is an exception to this rule:

  • The exemption applies to income and capital gains related to their charitable purposes – this means income generated from activities directly serving their charitable aims wouldn’t incur corporation tax
  • So if a charity engages in activities outside their charitable purposes, the income generated from those activities may be subject to corporation tax

Examples include commercial trading ventures not directly linked to their core mission or earning excessive profits unrelated to their charitable goals.

Charity tax rules

Regarding income not used for charitable purposes, UK charities must pay tax. 

This is called non-charitable expenditure. Charities also pay tax on dividends received from companies in the UK before 6 April 2016 and any profits from developing land or property.

Charities pay business rates on non-domestic buildings. However, they also receive an 80% discount and local councils may top this up with a discretionary relief, so that charities don’t pay anything.

In terms of making purchases, special rules for charities include paying 5% VAT on:

  • Fuel and power if they’re for residential accommodation, such as a care home
  • Charitable non-business activities e.g. free daycare
  • Small-scale use

Here is a government guide on what qualifies for VAT relief. There are also various conditions stipulating whether charities can pay a zero VAT rate when buying a range of services – for example, to advertise with the purpose of getting donations.

Charities must register for VAT if the total value of everything they sell that’s not exempt from tax is more than £85,000 per year.

Gift Aid tax relief

Gift Aid is a government scheme in the UK that lets charities boost the value of donations at no extra cost to donors.

  • When making a donation using Gift Aid, they confirm their UK taxpayer status and that they haven’t claimed tax relief elsewhere
  • The charity can then claim an extra 25p for every £1 donated, effectively reclaiming the basic rate of income tax from the government
  • Higher-rate taxpayers can claim additional tax relief on Gift Aid for the difference between their tax rate and the basic one (currently 20%)

Of course, the charity needs to be registered with HMRC to participate in Gift Aid and keep accurate records of the donations. And they must use the additional income for charitable purposes.

Final thoughts: Do charities pay tax?

The charity tax relief mentioned in this article is correct at the time of writing. But tax relief for charities is not necessarily fixed permanently.

For example, organisations such as the Charity Tax Group lobby the government with a view to seeing sufficient relief made available.

For more information on tax rules and regulations, take a look at our blog. We have an explainer on ways for businesses to pay less VAT, for example.

We also explain how tax on rental income works and have written a guide on R&D tax credits ready to read.

Recently, we discussed whether or not there is a new side hustle tax law on second jobs, such as selling goods on platforms including eBay and Vinted.

We are Accountants East London, with over 30 years experience and offering fixed prices – if you need any help with your taxes, look no further. For a free, no-obligation chat or any more information, please contact us.