As many charities continue to struggle to raise funds, highlighting the prospects of tax reliefs on donations is one way to encourage gifts. This article looks at how the gift aid scheme can be used to save tax.
Broadly, the government’s gift aid scheme is designed to help maximise the value of a gift made to a charity by allowing most UK taxpayers to claim tax relief on the gift.
How it works
Under gift aid, individuals can claim tax relief on making one-off or regular gifts to charity. No lower or upper limit applies on donations upon which tax relief may be claimed. The payment is treated as paid net (that is, as if basic rate income tax had been deducted at source).
The basic rate tax deemed to have been deducted by the donor is clawed back by HMRC if the donor’s income tax and/or capital gains tax (CGT) liability for the year is insufficient to match the tax retained. Higher and additional rate taxpayers can claim additional relief against their income tax or CGT liability, as appropriate.
The person making a donation doesn’t necessarily have to be working to be paying tax. This means, for example, someone receiving a state and/or another pension net of tax deductions may also be able to benefit from tax relief on gift aid donations.
Example: How much tax relief?
If you make a donation of £100 under the gift aid scheme and you’re a basic rate taxpayer, the charity is able to claim back tax of £25 from the government, which means the charity receives £125, but it costs you only £100.
A higher rate taxpayer can claim 20% (i.e. the difference between the higher rate of tax at 40% cent and the basic rate of tax at 20%) as a tax deduction on the total value to the charity of the donation. So, on a gift of £100, a higher rate taxpayer can reclaim £25 (i.e. 20% of the gross donation of £125).
The claim is usually made via the individual’s self-assessment tax return (see below).
Reduce last year’s tax bill
For tax-saving purposes (e.g. to reduce a liability to higher rate tax in a previous year), it is possible to elect for a donation to be treated as paid in the previous tax year. The election must be made to HMRC by the date on which the individual’s tax return was submitted for the previous tax year and, in any event, no later than 31 January following that tax year. An election can only be made if the gift can be paid out of taxed income or gains of the previous tax year.
The election provisions may be particularly useful to someone whose income for a particular tax year nudges just over the higher rate income tax threshold. It may be possible to make a gift under gift aid, which in turn will reduce liability to tax at the higher rate and mean that the taxpayer could potentially avoid paying tax at marginal tax rates of up to 64.75%.
Claiming tax relief
Under self-assessment, gift aid donations made in the previous tax year will be recorded on each year’s return, which would mean that for higher and additional rate taxpayers, there will be a delay in receiving the additional gift aid tax relief. However, the gift aid rules allow an individual to claim tax relief on donations made in the current tax year, up to the date their self-assessment return is submitted, if they either:
- want tax relief sooner; or
- will not pay higher rate tax in the current year, but did so in the previous year.
This claim cannot be made if:
the filing deadline has been missed (31 January for online filing); or
the donations do not qualify for gift aid - donations from both tax years together must not be more than four times what was paid in tax in the previous year.
Practical Tip:
The end of the tax year is a good time to review charitable donations to ensure that all tax relief due has been claimed and, where relevant, to ensure that timely elections are made to relate payments back to the previous tax year.
