Individuals are eligible for tax relief when making donations to UK-registered charities or charities registered in the European Economic Area (EEA). There are two primary methods by which an individual can receive tax relief: through the Gift Aid scheme and the payroll giving scheme. In this article, we will focus on how tax relief is applied under the Gift Aid scheme.
Gift Aid
Under Gift Aid, donations are considered to be made net of 20% basic rate tax. This means that if an individual donates £1,000 to a charity, the charity can claim an additional £250 from HMRC. As a result, the total amount the charity receives will be £1,250.
For basic rate taxpayers: No additional adjustments are needed in the tax computation because the taxpayer is deemed to have received the tax relief at source.
For higher or additional rate taxpayers: An adjustment is required in the taxpayer's tax computations. This is done by extending both the basic rate and higher rate tax bands to account for the grossed-up donation amount. Using the example above, both the basic and higher rate bands would increase by £1,250. This adjustment allows the taxpayer to pay more tax at the 20% rate rather than the 40% rate.
Gift Aid Declaration
In order for both the charity and the taxpayer to claim the relief, the taxpayer must make a Gift Aid declaration at the time of the donation. This declaration can be made in various forms, including in writing, via email, through the charity’s website, by text message, in person, or over the phone.
The declaration confirms that the taxpayer pays enough income or capital gains tax to cover the amount of tax reclaimed by the charity. If the taxpayer does not pay sufficient or any tax—such as if their income is below the personal allowance threshold—they must make up the difference through their self-assessment return.
Interaction with the Personal Allowance
Personal allowance is tapered when an individual's net income exceeds £100,000. The personal allowance reduces to zero once net income reaches £125,140.
If an individual has made a Gift Aid donation, the grossed-up donation is deducted from their net income when calculating the availability of their personal allowance. Therefore, higher rate taxpayers could not only benefit from the increase in their basic and higher rate tax bands but might also gain relief through the reinstatement of their personal allowance.
Other Notable Points
The maximum amount on which the donor can claim relief under the Gift Aid scheme is £2,500. Please note that this limit applies only to cash gifts and not to donations of quoted shares or land.
Taxpayers can elect for a Gift Aid donation to be treated as if it were made in the previous tax year. The donation and corresponding election must be submitted by 31 January of the tax year in which the gift was made.
For donations of quoted shares or land and buildings to a registered charity, the treatment differs. In these cases, the market value of the shares, land, or buildings is deducted from the taxpayer's net income, leading to a lower taxable income. However, if the shares were acquired within four years prior to the donation and were part of a scheme designed to increase the tax relief, the acquisition cost will be used instead of the market value.
A Community Amateur Sports Club (CASC) can claim Gift Aid in the same way as for registered charities.
Speak to an Expert
If you would like more information on how Gift Aid relief works or would like to determine if your donations qualify for this relief, please get in touch with us. Our team would be happy to assist you.
Authored by: London Tax Team
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