If you have ever given a donation to charity, you’ve probably been asked if you want to add Gift Aid to it. But it’s not always clear at the point of sale what this means, who is eligible and how exactly does this type of giving work? There are a few available ways to claim tax relief which we cover here. In this article we examine Gift Aid and how it applies in more detail, including who should not select Gift Aid.
What is Gift Aid?
Gift Aid is a type of tax incentive to encourage people to donate to charity in a tax efficient way. Gift Aid adds a percentage to your donation from HM Revenue and Customs (HMRC) which obviously benefits the charity itself, but this allows you to claim back tax relief on your donation. Which is great news for both yourself and your chosen charity. This scheme is managed by the government and it enables charities to increase the value of donations made by reclaiming the basic rate tax that has been paid on the gift.
How Does Gift Aid Work?
Gift Aid allows the charity to reclaim the income tax paid on your donation from the government, at no extra cost to you as the donor. This is because when you make a donation from your own money, you have effectively already paid income tax to the government in that amount of money. This scheme allows the receiving charity to claim back that income tax, since charities are not required to pay income tax. This allows you to pay a higher percentage of your tax deductions to the causes of your choice, than to the government who chooses what to do with your income tax on your behalf. The charity or not for profit organisation can currently claim 25p for every £1 you donate. When you make a Gift Aid donation, you are doing so with money that has already been taxed. If you are a basic rate taxpayer in the UK you will have made your donation out of income that has already been subjected to tax. The charity takes your donation and then reclaims the tax that you originally paid to HMRC.
Who is Eligible for Gift Aid?
You need to be a UK basic rate taxpayer to qualify for Gift Aid. Plus you must have paid enough tax to cover the amount of tax reclaimed by all charities on all your donations for the qualifying tax year, in which the donations have been made. If you do not earn enough money to pay tax, you will incur the cost of the Gift Aid ‘top-up’ which you will owe to HMRC. Sometimes HMRC will ask the charity to repay which is also not ideal. Or simply not honour the claim. Your chosen charity will ask you to sign a declaration confirming that you pay enough tax to offer Gift Aid. So you need to know for certain that you have paid more in tax to HMRC than you have pledged to charity via Gift Aid, in the same tax year. Additionally to income tax from either employment or self-employment, you might pay tax on a pension or investments, such as rental income which also qualify for Gift Aid. Other taxes such as VAT and council tax do not qualify for Gift Aid. Some income tax charges are excluded, such as income tax paid on a deferred state pension lump sum. To calculate if you have paid enough qualifying tax to honour your donations, divide the total donation value by four and compare this figure to the amount of tax that you have paid for the year, between 6th April and 5th April. If you are self-employed you are eligible to offer Gift Aid on your donation, as long as you have paid tax at least equal to the value of the Gift Aid.
Qualifying types of tax:
- Income tax
- Tax deducted at source from savings interest
- Tax on state pension and/or other pensions
- Tax on investment or rental income (including tax credits on UK dividends)
- Capital Gains Tax on gains
Who Can Claim Gift Aid?
Any charity or community amateur sports club (CASC) can claim Gift Aid. They need to be registered with a regulator, typically the charity commission and be based in the UK, EU, Iceland, Liechtenstein or Norway. They need all donors to confirm that donations are being made from the individual’s own funds and that they have paid UK Income Tax or Capital Gains Tax during that tax year at least equal to the value of the Gift Aid. Gift Aid cannot be claimed on a donation made by a group, it must be pledged by an individual in order for HMRC to confirm enough tax has been paid to cover the pledge. The simplest way to collect the right information is with a simple form which can be downloaded. Gift Aid cannot be claimed on donations gifted on behalf of someone else or for a company. Nor on donations that are given to family members or friends who participate in an event where the charity is contributing to their costs, or when a donation is made in return for goods or services
Tax Relief for Higher and Additional Rate Taxpayers
If you pay tax at more than the basic rate, you can claim tax relief for yourself via Gift Aid. The charity claims 20% tax from HMRC as usual, however the result is that the taxpayers basic rate allowance is increased, so they will pay the basic rate tax on a larger proportion of their earnings after Gift Aid. This can be declared on your self assessment tax return, or by asking HMRC to amend your tax code. This is a very worthwhile method for achieving tax efficiency.
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