Making The Most Of Gift Aid

Sarah Laing highlights gift aid tax relief and how to maximise charitable donations.

Under the gift aid regime, the amount of a qualifying gift is treated as a net amount from which income tax at the basic rate has been deducted. In calculating liability to tax for a particular year, the person making the gift can extend his or her basic and/or higher rate band limits by an amount equal to the ‘grossed up amount of the gift’ (i.e. the amount which, after deducting income tax at the basic rate for the tax year in which the gift is made, leaves the amount of the gift).

The overall effect of this will be tax neutral for a basic rate taxpayer, and additional tax relief on the donation for a higher or additional rate taxpayer. Although there will be no further tax relief due to the basic rate taxpayer, the charity will be able to reclaim the notional tax deducted from the donation.

Example 1: Basic rate taxpayer

Joe is a basic rate taxpayer who makes a gift of £100 (net of tax) to a charity under the gift aid scheme.

The grossed-up value of the donation is £125 (£100 x 100/80) and the charity can claim back tax of £25 from the government. The charity therefore receives £125, but it has only cost Joe £100.

Example 2: Higher rate taxpayer

Harry is a higher rate taxpayer who also makes a gift of £100 (net).

Again, the charity receives £125, as above, but Harry can also 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. He can, therefore, claim higher rate relief of £25 (20% of his gross donation of £125). Harry makes this claim via his self-assessment tax return.

As seen in the examples above, in arriving at a person’s adjusted net income for calculating liability to income tax, a deduction is made for the grossed-up amounts of any gift aid donations paid. This is important because some reliefs and allowances are given, or withdrawn, by reference to the person’s adjusted net income. Such adjustments can have a significant impact on a donor’s income tax position:

personal allowance: The personal allowance (£11,850 for 2018–19) will be reduced where an individual’s adjusted net income for the tax year exceeds £100,000. The reduction is achieved by deducting £1 of personal allowance for every £2 of income over £100,000, so that it is withdrawn entirely where income exceeds £123,700. A person in this position may increase his or her personal allowance entitlement, and so save tax at 40% (for non-savings income), by making a gift aid donation;
child benefit: The high-income child benefit charge (HICBC) claws back all of the child benefit received by a household where a person in that household has adjusted net income exceeding £60,000, and a proportion of the child benefit where income is between £50,000 and £60,000. By making a gift aid donation, a person could reduce or avoid the HICBC.

Other donations

Income tax relief can also be claimed by an individual who makes a gift to a charity of a qualifying investment (common examples include shares or securities listed on a recognised stock exchange and qualifying interests in land in the UK). The rules governing relief on gifts of investments can be complex and, for gifts made on or after 1 April 2011, tax relief will be subject to the ‘tainted donations’ rules. Professional advice is always recommended in cases of doubt.

Practical Tip:

It is possible to elect for a donation to be treated as paid in the previous tax year. Therefore, it is worth checking at the end of each tax year whether it would be beneficial to relate back any such payments. In particular, this may help to reduce a liability to higher rate tax in the previous tax year.