Many people are aware that tax relief can be claimed by the charity when donations are made under gift aid, however, they are not always aware of how they may be able to personally receive tax relief or indeed, many will be unaware of the circumstance in which they could have an unwelcome tax bill as a result of their gift aid donations.
This article therefore highlights some tips and traps associated with gift aid donations.
Have you made gift aid payments?
Gift aid is a tax efficient way for UK taxpayers to make donations to UK/EEA registered charities.
Donating through gift aid means that charities can claim an extra 25p for every £1 they receive.
If an individual is a higher rate taxpayer, they can also benefit by obtaining relief for the donation on their tax return. The individuals basic rate band is extended by the gross charitable donation and therefore increases the proportion of your income taxed at lower rates.
For example, if a higher rate taxpayer (40%) donates £100 to charity, their basic rate band is extended by £125. The charity claims 20% tax from HMRC as it normally would, however, the taxpayer also benefits from the donation as now £125 of income that would have been taxed at 40%, is now taxable at 20%. The result is that the taxpayer receives additional tax relief of 20% by paying less higher-rate tax.
In addition, if an individual is an additional rate tax payer, (45%) then income tax relief increases to 25%.
For additional rate tax payers the tax-free personal allowance (£12,500 for 2020/21) reduces by £1 for every £2 of income above £100,000. However, gift aid donations extend the £100,000 threshold, such that the personal allowance is restored by £1 for every £2 of gross gift aid donations. The combined effect of the extended basic rate band and the restored personal allowance gives an effective rate of tax relief of 60%.
The easiest way to make a claim for gift aid donations is to do so through a self-assessment tax return.
TIP: Get relief sooner
Individuals who make regular donations may well be familiar with the way in which tax relief can be claimed, however, is there a way to get relief sooner which many are not aware of?
This flexibility essentially allows an individual to carry back gift aid donations they make in the current tax year, up to the date they file their return, to the previous tax year if they want to claim relief sooner or will not be a higher rate tax payer in the current year, but they were in the previous year.
For example, when an individual was completing their 2019/20 tax return, they could have claimed gift aid donations made during the period 06.04.2019 - 05.04.2020 and they could have included any donations made in the current year (2020/21), up to the point they submitted their tax return, by the 31 January 2021 deadline.
TRAP: What if you have not paid enough tax?
However, be aware of the rules if you have not paid enough tax. This might be something to be mindful of for the current tax year, where an individual’s income has been impacted by Covid-19 and is lower.
When an individual is making a gift aid declaration, they are stating that they will have paid enough tax during the year to cover the 20% tax the charity will reclaim from HMRC. If it turns out the individual hasn’t paid enough tax, then they will need to make good the tax claimed!
This article gives you an overview of the key aspects specific to gift aid donations but there are other rules in relation to charitable donations and gifts that should be considered. We would always recommend, especially if there is a sizeable donation to be made, that advice is sought.
Our tax team has a wealth of knowledge from tax tips when preparing your tax returns, to advice around more complex tax planning for the future. For help with your tax affairs please get in touch by emailing firstname.lastname@example.org