Charities play a huge role in society by helping communities, supporting causes and making a difference in many people’s lives. But they still make money… and that may leave you wondering whether charities pay tax or not in the UK.

We’ve got you covered. Whether you’re considering starting a charity or you’ve got your first tax return approaching, read our blog to determine:

Whether charities pay tax
What income is taxable for charities
How you can benefit from the help of one of our excellent charity accountants here at DH Business Support

Are Charities Taxed?

In the UK, most charities are exempt from paying taxes to the HMRC as long as they meet certain criteria. This tax exemption benefits charities by allowing them to use the money they earn to support their cause rather than paying it towards tax.

However, just because charities are exempt from taxes doesn’t mean they don’t have to think about paying taxes at all. Charities have to follow certain rules to ensure they stay within their tax-free guidelines.

Charitable expenditures are expenses that you do not have to pay tax on as a charity and these include:

Tax on donations
Profits from trading
Bank interest
Profits from selling assets
Buying property

To get tax relief, you must be recognised by HMRC.

What Constitutes Taxable Income for a Charity?

Not all charitable income qualifies for tax relief, so you will have to submit a tax return for this income.

The items that charities must pay tax on in the UK include:

Dividends received from UK companies before 6 April 2016
Profits from developing land or property
Purchases – but there are certain VAT rules for charities

You can claim back tax that’s been deducted, for example, on bank interest and donations (this is known as gift aid)

What Is Gift Aid?

Gift Aid is a tax relief scheme that allows charities to claim back 25p for every £1 donated by a UK taxpayer. This gives charities a boost and allows donations to go further. If you’re a taxpayer and donate to a charity, the charity can then reclaim the basic rate of tax you’ve already paid on that donation.

For example, if you donate £100, the charity can claim an extra £25, making your donation worth £125 in total, at no extra cost to you.

Gift aid can be applied to all voluntary donations of money, large or small, made by a taxpayer.

What Is the Small Trade Exemption?

The small trade exemption is a rule that allows charities to carry out certain small-scale trading activities without having to pay tax on the profits, for example, charity shops or fundraising events.

To qualify, the charity’s income from these activities must be below a certain threshold, and the activity must be carried out in support of the charity’s main objectives. For instance, a charity could sell second-hand items or hold a fundraising raffle without worrying about paying taxes, as long as the income is used to fund the charity’s core work.

Expert Charity Accountants at DH Business Support

At DH Business Support, we offer specialist charity accounting services for non-profit organisations in the UK. Our team of expert accountants are on hand to help and provide you with support for your charity’s finances.

Our services are tailored to suit your charity’s needs, and our team is committed to ensuring that you achieve your goals to benefit your charity long term.

We offer support in various areas, including: