Charities play a vital role in British society, supporting many important causes across health, education, research and more. You may wonder whether these organisations pay taxes, particularly as they often rely on generous donations. The tax rules around charities can feel complex, but understanding them helps trustees, finance managers and supporters know how funds are handled. Below, we explain how UK tax laws apply to charities.
How does HMRC define a charity?
In the UK, a charity must be established for charitable purposes, such as relieving poverty or advancing education. It also has to be subject to the jurisdiction of a UK court. Once it meets these conditions and is registered with the relevant regulator (for example, the Charity Commission for England and Wales), it can apply to HMRC for recognition of charitable status. This recognition grants access to certain tax exemptions, if any profit or income is used for charitable objectives.
Tax exemptions for charities
While charities are broadly exempt from corporation tax on income from charitable activities, this exemption only applies if the income or gains are used solely for charitable purposes. In practice, that means money received from donations, grants, membership fees or trading directly linked to the charity’s main objectives is usually exempt.
However, if a charity starts trading in ways that do not relate to its charitable purpose, it may face a tax charge. For example, if a hospice sells Christmas cards to support its care services, that falls under its charitable activities, but if it runs a completely unrelated business, that could be subject to corporation tax. For the 2025/26 tax year, the general corporation tax rate for non-charitable companies can be up to 25% (depending on profits), but HMRC does not apply that rate to charities’ primary purpose income. Instead, charities can often use a subsidiary trading company to carry out non-charitable trading so that the charity itself remains protected from extra tax liability.
VAT and charities
Value Added Tax (VAT) affects charities in various ways. Charities must register for VAT if their VAT-taxable turnover from business activities crosses the registration threshold, set at £90,000. Some items and activities qualify for reduced or zero rates if they relate to charitable work, but others fall under the standard rate.
Charities can also claim some VAT reliefs on buying certain goods and services, including items like advertising or the construction of new charity buildings. Still, partial exemption rules can mean that not all VAT is recoverable. If your charity deals with high volumes of VAT-rated transactions, it’s best to keep detailed records and submit accurate returns.
Gift Aid
Gift Aid is a well-known scheme that boosts donations to charities. When an individual donates to a recognised charity, the charity can claim an extra 20% from HMRC, assuming the donor has paid at least that amount of Income Tax. Higher-rate taxpayers can claim additional tax relief themselves via their self assessment tax return. For 2025/26, personal tax thresholds look set to remain the same as they were in recent years, with the personal allowance at £12,570 and the basic rate set at 20%. By making the most of Gift Aid, charities can increase the value of donations without costing donors extra money.
Business rates relief
Charities can receive mandatory relief on their business rates of 80% if a property is used for charitable purposes. Local councils may grant an additional 20% relief at their discretion, which can effectively lead to a 100% reduction in business rates. This relief makes a significant difference to property costs.
For more information on selecting the relevant structure for your charity, read the Charity Commission’s guidance.
Trading subsidiaries and tax implications
Some charities set up trading subsidiaries to handle commercial activities that fall outside their primary purpose. The profits from that trading go to the charity in the form of a donation, often under Gift Aid, which reduces the subsidiary’s taxable profits. This approach can protect the charity from losing its tax exemptions, while also making sure commercial ventures remain viable. Yet it’s important to manage these structures carefully to meet both legal and tax requirements.
Reporting and record-keeping
Even if a charity has no corporation tax to pay, it must still submit financial reports as required by HMRC. Failure to report on time can lead to penalties. Trustees or finance managers should keep thorough accounting records, which show how income is spent on charitable activities. Clear, well-organised records create transparency for donors, regulators and the public. It also makes day-to-day processes, like claiming Gift Aid or preparing statutory accounts, much more straightforward.
Why it matters to keep charity status intact
Maintaining charitable status is key for keeping tax benefits, so charities must ensure they continue meeting the conditions that earned them that status. Trustees have a responsibility to see that the organisation operates within its charitable objectives. If you’re unsure about your compliance with tax or charity regulations, we suggest you consult a professional adviser early on. Any slip in compliance can result in losing these valuable tax reliefs.
How we can help
We handle clients across various sectors, including charities, and we know how important it is to be certain you’re meeting your legal obligations without paying more tax than you should. Our accountants understand the system inside out and aim to give you calm, informed guidance every step of the way. If you need more details on how your charity might be affected by HMRC rules, feel free to chat to us.
Final thoughts
Do charities pay taxes? In short, charities can benefit from significant tax reliefs and exemptions, but they have certain obligations that must be met to retain these advantages. It’s a system designed to ensure charitable organisations can focus their time and energy on their core goals, while still remaining transparent and accountable. Knowing where your obligations end and your tax-free activities begin can protect your charity’s reputation and financial health.
If you’d like tailored advice on any of these areas, we’re ready to help. Our aim is to lighten your administrative load so that you can continue your vital work with confidence.
Would you like support with your charity’s tax obligations? Contact us to arrange a consultation. We’ll guide you through each step, so you can focus on making a real difference.
