There are many ways to make monetary donations to charity, some of which can have potentially favourably tax advantages for taxpayers but also benefit the charity. One of the most common schemes used to make monetary donations to charity by taxpayers is by using the Gift Aid scheme.
What is the Gift Aid Scheme and how does this work?
Gift Aid is a government scheme that allows the charity receiving the donation to claim back basic rate tax on your donation. For example, if you are a basic rate taxpayer and you donate £100, the charity can reclaim a further £25 in addition to the £100 donation, so will effectively receive £125.
Therefore, if you do decide to make donations to charity under the Gift Aid Scheme, you must be satisfied that you can certify that you have paid sufficient income tax or capital gains tax to cover the tax element of your donation. The charity you are donating to will ask you to sign a Gift Aid Declaration certifying that you have paid sufficient tax to cover the basic rate tax relief on your donation so that the charity can then make the full reclaim.
Higher rate taxpayers and the Gift Aid Scheme
If you pay tax at a rate above the basic rate and you make a donation to charity under the Gift Aid scheme, not only will the charity be able to reclaim 25p for every £1 you donate but you are entitled to claim relief on the amount above what the charity has reclaimed and up to the extent of your tax rate. Taking the same example of a £100 donation, if you pay tax at the rate of 40% you can claim back £25.00 on this level of donation (£125 x 20%).
How do I claim the relief?
You should include Gift Aid donations on your annual tax return for the tax year that the donation relates to. There is also the facility to carry back the relief from the current tax year in which you make the donation to the previous tax year provided that you have not yet filed your tax return for the previous tax year. For example, a donation made on 30 July 2023 would normally fall within the 2023/2024 tax year. However, if you have not yet filed your tax return for the year to 5 April 2023 (you have up until the 31 January 2024 to do this) you can elect to carry back the July 2023 donation to reduce your tax liability or indeed claim back overpaid tax, in the 2022/2023 tax year. This is useful if in one year, you have a particularly high tax liability that you do not anticipate repeating in the next tax year. A reduction in your tax liability will also reduce your payments on account if your income situation necessitates payments on account.
Non or lower rate taxpayers
Whilst the prospect of a charity being able to receive an enhancement to your donation may be appealing, care should be taken when certifying that sufficient tax has been paid by the donor to satisfy the basic rate tax credit attached to a Gift Aid donation. If a donor has not paid sufficient tax at source in the year of making the donation, this will result in the donor incurring a tax liability. If the donor completes tax returns annually, the tax liability can be calculated and paid through the self-assessment system. However, if there is no adjustment to a donor's tax position each year through either the Pay As You Earn (PAYE) system or the self-assessment system, then this will result in the charity incorrectly making a reclaim for basic rate tax suffered on the donation. You must ensure that if your taxpayer status changes and you cannot certify that sufficient tax has been paid on the donation, you must inform the charity so that their records can be updated to reflect this change.
Payroll Giving also known as Give As You Earn (GAYE)
If your employer, pension provider or company operates a payroll giving scheme, you can make monetary donations to charity which are deducted directly from your gross salary before your salary is taxed under Pay As You Earn (PAYE) system. The amount of income tax relief you can benefit from depends on which rate of tax you pay and where you are resident in the UK.
Scottish Taxpayers
For every donation of £1 you make to charity, this will cost you:
• 81p if you are a starter rate taxpayer
• 80p if you are a basic rate taxpayer
• 79p if you are an intermediate rate taxpayer
• 59p if you are a higher rate taxpayer
• 54p if you are a top rate taxpayer
The Rest of the UK
For every donation of £1 you make to charity, this will cost you:
• 80p if you are a basic rate taxpayer
• 60p if you are a higher rate taxpayer
• 55p if you are an additional rate taxpayer
This type of gifting qualifies for income tax relief at source and therefore there is no need to include this information on a tax return. This type of charitable giving does not allow for a reduction in National Insurance contributions.
There is also tax relief that can be claimed for taxpayers who make donations of other assets such as stocks and shares to charity; this scheme is known as the Share Aid scheme and for some has more favourable tax advantages.
