Technical Connection explains how using Gift Aid can mean a tax saving for clients
The pandemic put many fundraising events such as marathons on hold, although that did not stop some raising large amounts for charity. More recent world events, such as the Ukraine war, have instigated a significant increase in charitable donations. With that in mind, let’s look at how Gift Aid works.
Gift Aid is a scheme that enables UK charities and community amateur sports clubs (CASCs) to claim basic rate tax from HM Revenue & Customs that the donors (those making the gift) have paid on their cash gifts. This means payments have to be made from the donor’s own funds and they must have paid income tax and/or capital gains tax (CGT) during that tax year. It is also possible to carry back a payment to the previous tax year.
Donating through Gift Aid enables charities and CASCs to claim an extra 25p for every £1 gifted. This means that the net effect increases the value of donations by 25%.
It is vital for the donor to make a Gift Aid declaration for the charity to claim. This is usually done by filling in a form – available from the respective charity – or if a donation is made online, such as through Just Giving, then the donor is asked to tick a box to verify they are a UK taxpayer to make the claim.
Sky has £52,500 of taxable income in 2022/2023, which means that after taking account of the basic rate threshold of £50,270 (£12,570 personal allowance and £37,700 basic rate band), she is a higher-rate taxpayer. She decides to make a charitable donation and claim Gift Aid on a payment of £1,784.
Tax relief available on a Gift Aid payment is achieved by extending the basic rate limit by the grossed-up amount of the donation in the tax year in which the payment is made. It is also possible to extend the higher-rate tax limit (£150,000) in appropriate circumstances.
In this case, the payment of £1,784 made by Sky is grossed up by the basic rate of tax (20%) treated as paid – so it would therefore be £2,230.
This means that the basic rate tax limit (£37,700 for 2022/2023) would be increased by £2,230 to £39,930.
The effect of increasing the basic rate limit for Sky is that £2,230 of her income that would otherwise be taxed at 40% is instead taxed at 20%. This means that after deducting her personal allowance of £12,570, the remaining amount of £39,930 (£52,500 minus £12,570) is taxed at the basic rate. The tax relief available on £2,230 is therefore £446. The effective rate of tax relief on the £1,784 Gift Aid payment is therefore 25%.
However, note that the donor must have paid at least as much in income tax and/or CGT in the tax year as they want to claim in Gift Aid.