Do Charities Pay Tax in the UK?

Charities in the UK enjoy a wide range of tax exemptions, but that doesn’t mean they never pay tax. While many types of income are exempt, there are situations where tax applies – especially when a charity engages in commercial activities or has income that falls outside the rules.

This guide explains when charities are exempt from tax, when they do have to pay, and how tax reliefs like Gift Aid can benefit both the charity and its donors.

Do Charities Pay Tax?

In short, most registered charities in the UK do not pay tax on the majority of their income or gains, provided the money is used for charitable purposes. This includes:

• Donations from individuals or companies

• Legacies left in wills

• Grants from public or private organisations

• Rental income from charity-owned properties

• Gains from selling assets used for charitable work

However, not all income is automatically exempt, and there are circumstances where charities may be liable to pay tax.

Tax Reliefs for Charities

Charities benefit from various tax exemptions and reliefs. These include:

Corporation Tax Relief

Charities do not pay corporation tax on profits from charitable trading, investment income, or capital gains – as long as the profits are used for charitable purposes.

Gift Aid

When a UK taxpayer makes a donation and agrees to Gift Aid, the charity can claim an extra 25p for every £1 donated. This is reclaimed from HMRC based on the donor’s tax status.

VAT Relief

While charities are not exempt from VAT, they may qualify for certain VAT reliefs or zero-rated goods and services (for example, on advertising or medical equipment). They can also get reduced rates on some utility bills.

Business Rates Relief

Charities can claim up to 80% mandatory relief on business rates for premises used wholly or mainly for charitable purposes. Some local councils offer discretionary relief for the remaining 20%.

Stamp Duty and Capital Gains Relief

Charities are exempt from Stamp Duty Land Tax and capital gains tax on qualifying assets.

When Do Charities Pay Tax?

Charities may have to pay tax if:

• They engage in non-charitable trading that falls outside HMRC’s guidance

• Income is not used for charitable purposes

• They receive rental income from non-charitable use of property

• They make profits from activities not directly linked to their charitable work

• They pay employees or trustees in a way that does not meet HMRC’s requirements

• They run a subsidiary trading company that doesn’t transfer its profits back to the charity

For example, if a charity runs a café open to the public as a commercial venture (rather than as part of a training programme or service), profits from this may be taxed unless operated through a trading subsidiary.

Do Charities Pay Corporation Tax?

Charities themselves do not usually pay corporation tax on profits earned from:

• Primary purpose trading

• Fundraising events

• Donations and grants

• Investment income

However, where a charity runs non-primary purpose trading activities, or if income is not applied for charitable purposes, corporation tax may apply.

Charities often set up subsidiary companies to carry out commercial trading. These subsidiaries pay corporation tax unless they donate their profits back to the charity under Gift Aid rules.

Charity Tax Rules and Reporting

Charities must still file tax returns when requested by HMRC. This may happen if the charity has taxable income or if HMRC wants to check that reliefs are being applied correctly.

Even if no tax is due, charities should keep full and accurate records, including:

• Gift Aid declarations

• How income is applied to charitable purposes

• Trading activities and their classification

• Transactions with connected businesses or trustees

Failing to comply with tax obligations can lead to penalties or loss of tax-exempt status.

Gift Aid Tax Relief

Gift Aid is one of the most valuable tax reliefs for charities. To benefit:

• The donor must be a UK taxpayer

• The charity must be registered for Gift Aid with HMRC

• The donor must complete a valid declaration form

For higher or additional rate taxpayers, Gift Aid also provides personal tax benefits. They can claim back the difference between their tax rate and the basic rate on their donations through Self Assessment.

Final Thoughts

Charities in the UK are generously supported through tax reliefs, but they are not automatically exempt from all taxes. To remain compliant, charities need to understand the boundaries between charitable and non-charitable trading, apply income for approved purposes, and meet all reporting obligations.

If you manage or work with a charity, it's wise to consult a charity tax adviser to ensure you're making the most of the available reliefs – and avoiding unintended tax liabilities. Being proactive with charity tax planning can protect both your finances and your charitable mission.