There’s a common belief that charities in the UK are completely exempt from paying tax. While registered charities do benefit from significant tax reliefs, they are not entirely off the tax radar. In fact, under certain conditions, charities may still be liable for taxes such as corporation tax or income tax—particularly if their income is not fully applied to charitable activities.
Understanding the tax obligations of your charity is crucial for staying compliant and financially healthy. Whether you handle your finances in-house or work with charity accounting experts or an outsourced finance team, having a clear grasp of when and how tax applies helps you protect your resources and focus on your mission.
Tax Reliefs Available to Charities
Once registered with the Charity Commission, UK charities enjoy exemptions from corporation tax on a variety of income sources, including:
- Donations
- Profits from trading activities
- Investment income
If tax has been deducted from donations (e.g. through Gift Aid), charities can reclaim it through HMRC’s online charity service—boosting your fundraising efforts significantly.
Corporation Tax: When Must a Charity Pay?
Most charities are not required to pay corporation tax or submit tax returns. However, exceptions exist. You may need to file a corporation tax return if:
- Your charity earns income that isn’t covered by available tax reliefs
- HMRC specifically requests a return
- Your charity is involved in non-charitable commercial activity
For example, if your organisation generates revenue through a commercial enterprise that doesn’t directly support your charitable goals, this may be classified as non-charitable expenditure, and could trigger a tax liability. In such cases, working with accountants who specialise in not-for-profits can ensure your income and spending are accurately classified and tax-efficient.
What Counts as “Charitable Purposes”?
Tax relief is only granted if your charity’s income is used for charitable purposes, as defined under the Charities Act. These include, but are not limited to:
- Advancing education
- Alleviating poverty
- Promoting health and wellbeing
- Supporting human rights
- Encouraging arts, culture, and heritage
- Animal welfare
Even day-to-day operational costs—such as payroll processing, rent, and staff wages—may qualify for relief, as long as they directly support your charitable objectives.
Trading Income and the Small Trade Exemption
Charities are allowed to conduct a limited amount of non-charitable trading without incurring a tax charge. This is covered by the small trade exemption, which allows:
- Up to £5,000 of trading income for small charities
- Up to £50,000 for larger charities
Staying within these limits is important to avoid triggering corporation tax liability. Financial oversight is key to managing this aspect effectively.
Scenarios Where Charities May Be Taxed
Charities can become liable for tax in several scenarios, including:
- Dividends from UK companies (pre-April 2016)
- Profits from property development
- Non-charitable investments
- Trading activity unrelated to your charity’s mission
Additionally, indirect taxes such as VAT still apply. However, charities may be eligible for reduced VAT rates (often 5%) or special exemptions on certain goods and services. It’s worth seeking charity VAT advice to ensure you’re paying the correct rates and claiming all available reliefs.
For non-domestic properties, most charities receive an 80% discount on business rates—a significant cost-saving benefit.
Subsidiary Trading Companies: A Smart Approach
If your trading income exceeds the small trade exemption limit, you can set up a subsidiary trading company. This separate legal entity can conduct commercial activity and donate profits back to the charity. With the guidance of non profit accounting professionals, this structure can help safeguard your charity’s assets and optimise tax efficiency.
Strengthening Your Charity’s Financial Strategy
Tax compliance is just one piece of your charity’s financial strategy. A strong finance function—whether internal or outsourced—can support you in:
- Financial forecasting and budgeting
- Management reporting for trustees
- Grant and funder reporting
- Year-end accounts preparation
- Charity Commission compliance
A reliable finance partner can also offer insights into cash flow management, project funding, and strategic planning—helping your organisation grow with confidence.
Final Thoughts
Charities in the UK benefit from generous tax reliefs, but they are not automatically exempt from all taxes. Understanding your tax position and working with expert charity accountants or virtual CFO services can help you stay compliant, avoid penalties, and make the most of available exemptions.
Need help managing your charity’s finances? Outsourced finance teams and not-for-profit specialists offer flexible, scalable support—freeing you to focus on what matters most: delivering your mission.
