Sarah Laing focuses on how to give money to charity in a tax-efficient way.
By using the Government’s Gift Aid scheme you can receive tax relief on your donations to charities, and the charity obtains the maximum benefit from your gift. Gift Aid is for gifts of money by individuals who pay UK tax.
Under the scheme, you can claim tax relief on making one-off or regular gifts to charity. There are no lower or upper limits on donations on which tax relief may be claimed. However, the payment you make is treated as paid net of basic rate tax and the basic rate tax deemed to have been deducted by you will be clawed back by HMRC if your income tax and CGT liability for the year is insufficient to match the tax retained. If you are a higher or additional rate taxpayer, you can claim additional relief against income tax or capital gains tax, as appropriate.
Example 1 – Basic rate taxpayer gives £100 under Gift Aid
Graham is a basic rate taxpayer and makes a donation of £100 to a registered charity. The gift is treated as being made net of basic rate tax. The ‘grossed-up’ gift is therefore £125 (£100 x 100/80 for a basic rate of 20%). The charity is able to claim back the tax of £25 from the Government. Therefore, the charity actually receives £125, but it has only cost Graham £100.
Example 2 – Higher rate taxpayer gives £100 under Gift Aid
Harry is a higher rate (40%) taxpayer. He can claim 20% (the difference between the higher rate of tax at 40% and the basic rate of tax at 20%) as a tax deduction on the total value to the charity of his donation. So he can reclaim higher rate relief of £25 (20% of his gross donation of £125). He will make a claim for this additional tax relief on his self-assessment tax return. This means that the £100 gift has only cost Harry £75, but the charity still receives £125.
If Harry was liable to the additional rate of tax (currently 45%) he would be able to claim back £31.25 (£125 x 20% plus £125 x 5%) on his £100 donation to the charity.
Making a claim
When you make a donation to charity, you’re normally asked to consider making your donation using Gift Aid. If you agree, the charity normally gives you a simple form to complete declaring that you want to make donations under Gift Aid. You should complete a separate declaration form for each charity you want to donate to, but one form can cover every gift made to the same charity.
Payroll giving
Some employers operate payroll giving schemes. Under this type of scheme, an agreed deduction is taken from your pay before tax is calculated, which means that you obtain tax relief on the donation at your top rate of tax. For example, for 2013-14 if you donate £5 to charity and you pay tax at the basic rate, you pay only £4 because you save the 20% basic rate tax. If you’re a higher rate taxpayer, it only costs you £3.
The main benefit of payroll giving is to create a regular flow of funds for the benefit of the charity or charities of your choice. No upper limit applies for tax relief on donations – you can give as much as you like under the scheme.
Practical Tip:
For tax-saving purposes, you can 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 your 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.
