Do Charities Pay Tax in the UK? Key Tax Exemptions and Reliefs Explained

person filing tax return for their uk charity on brown wooden table near white ceramic mug

In the UK, charities do enjoy certain tax exemptions and reliefs, but they are not automatically exempt from all taxes. Understanding which taxes apply and which do not is crucial for any charity looking to manage its finances effectively.

So, do charities pay tax in the UK? The short answer is that they do not pay tax on their income or gains, as long as they meet certain criteria. However, charities can still be subject to some taxes in certain situations.

What Taxes Are Charities Exempt From?

1. Income Tax and Corporation Tax

Registered charities are generally exempt from paying Income Tax and Corporation Tax on most of their income. This includes money they raise through donations, fundraising events, and grants. 

However, the income must be used for the charity’s approved charitable purposes. If a charity earns money from activities unrelated to its charitable goals, these could be taxable unless covered by a specific exemption.

Example
A charity running a bookshop to raise funds for its cause would usually be exempt from tax on the shop’s profits, provided the proceeds are used for the charity’s purpose.

2. Capital Gains Tax

Charities are exempt from Capital Gains Tax when they sell or dispose of assets such as property or shares. Again, this is on the condition that the gains are used for charitable purposes. This tax relief can be particularly beneficial for charities with valuable assets.

3. VAT (Value Added Tax) Reliefs

Charities are not exempt from paying VAT outright, but they do benefit from several VAT reliefs. For example, they may be able to claim zero-rated VAT on certain goods and services like advertising or disability aids. 

Additionally, if a charity is engaged in business activities, it may need to register for VAT, depending on its turnover. Careful management of VAT obligations is important to avoid unexpected costs.

4. Business Rates Relief

If a charity occupies non-domestic property (such as office space or a charity shop), it is entitled to an 80% reduction in Business Rates. 

Local authorities may also offer further relief of up to 20%, meaning some charities can benefit from a complete exemption from Business Rates.

When Might Charities Have to Pay Tax?

While charities enjoy many exemptions, there are certain circumstances in which they may be required to pay tax. These can include:

Non-charitable Trading Activities
If a charity engages in trading activities not directly related to its charitable purpose, it may be liable for Corporation Tax. For example, if a charity operates a café that serves the general public rather than solely fundraising, the profits could be taxable.

Employment Taxes
Charities must still pay taxes related to employing staff, including Income Tax and National Insurance Contributions (NICs) through PAYE (Pay As You Earn). 

VAT on Certain Purchases
While there are reliefs, charities do still pay VAT on many of the goods and services they purchase. This can add up, especially for larger organisations, so it’s important for charities to assess where VAT relief might be available.

Tax Considerations for Charitable Donations

For those donating to charities, there are also tax advantages that benefit both the charity and the donor. One of the most common methods is Gift Aid. Under Gift Aid, charities can claim an additional 25p from HMRC for every £1 donated by a UK taxpayer, at no extra cost to the donor. The donor can also benefit by claiming higher-rate tax relief on their donation if they are a higher-rate taxpayer.

Tax Planning for Charities

While charities enjoy significant tax advantages, tax planning is still an essential aspect of managing charitable funds effectively. Poor tax planning can lead to missed opportunities to maximise income or, in worse cases, unexpected tax liabilities. It is important for charities to regularly review their tax status, ensuring they comply with the rules while taking advantage of available reliefs.

Professional advice can make a significant difference, especially as charities grow and engage in more complex activities. Whether it’s about VAT registration, Gift Aid claims, or trading rules, having a knowledgeable advisor on hand can prevent potential pitfalls and ensure that the charity maximises its resources for its intended purpose.

Conclusion

While UK charities benefit from a range of tax exemptions and reliefs, they are not entirely exempt from the tax system. Understanding the rules around income tax, Corporation Tax, VAT, and Business Rates, as well as planning for non-charitable trading activities, is key for ensuring compliance and financial health. 

How CRM Can Help 

At CRM Accountants, we specialise in helping charities navigate the UK tax system. If you need advice on how to maximise your tax reliefs or ensure compliance with tax regulations, don’t hesitate to get in touch with our expert team. We’re here to help your charity focus on what matters most – making a difference. 

Next steps

For personalised support and expert guidance with your finances, you can count on CRM. Fill out our contact form or call us at 01865 379272. We’re here to simplify your financial journey.