If you make a payment to a charity or community amateur sports club (CASC) that is registered for gift aid with HMRC, you will be asked to tick the box on the Gift Aid declaration to confirm that you are a UK taxpayer. The charity is then able to claim an extra 25p for every £1 you donate, being the income tax paid on your income.
What if I am a basic rate taxpayer?
For example, you earn £125 gross, and income tax of £25 (20%) is deducted, leaving you with net pay of £100, which you then donate to the charity, and in turn the charity reclaims £25 from HMRC.
What if I pay more than 20% in tax?
If you are an intermediate Scottish taxpayer (paying 21% tax), or a higher-rate or additional rate taxpayer, paying 40-46% income tax, the charity can still only claim 20% tax back from HMRC, however, you can claim additional income tax from HMRC.
For example, you earn £169 gross, but have income tax of £69 deducted (41%), leaving you with net pay of £100, which you then donate to charity, as in the earlier example of a basic-rate taxpayer. The charity would still only be able to reclaim £25, but you would be able to claim an additional £26.25 from HMRC. The gross Gift Aid donation (the net amount donated, plus the basic rate tax reclaimed by the charity – in this example, a £125 gross donation) increases your basic rate band of tax, so that you are essentially only paying basic rate tax on that portion of your income – basic rate tax which has been reclaimed by the charity.
If you are registered for Self Assessment, this additional tax relief will be included in your Tax Return. If you have no other reason to be filing personal Tax Returns, the adjustment can be made to your in-year tax code or end-of-year tax calculation. You can amend tax calculations for up to 4 previous tax years.
What if I don’t pay income tax?
If you have made a gift aid declaration when making a donation, and your end-of-year tax calculation shows that you did not pay enough income tax to cover what the charity has reclaimed from HMRC, you will need to make up the difference in income tax to HMRC.
If you do not expect to be paying any income tax in a tax year, you may wish to cancel your Gift Aid declaration with charity, otherwise they will continue to claim Gift Aid on your donations. You are usually asked about Gift Aid when making a one-off donation, however, if you make regular donations, e.g. by monthly Direct Debit, the declaration will be made when the agreement starts, so you may wish to notify the charity during the tax year if you wish to remove the Gift Aid declaration.
For Gift Aid purposes, it is only the income tax that can be reclaimed by the charity. For example, National Insurance deducted from employment earnings, or paid on self-employment earnings, cannot be offset against what the charity has reclaimed from HMRC.
I was a higher-rate taxpayer in the last tax year, but didn’t make any Gift Aid donations in that tax year – can I make them now to reduce last year’s tax bill?
Potentially – but the tax relief on Gift Aid donations can only be carried back to the previous tax year, and it must be included in the original submission of the Tax Return for the year you wish to claim relief. For example, if you made a donation in September 2019, and you wish to carry it back to the year ended 5 April 2019, you can only do so if you have not already submitted a Tax Return for the year ended 5 April 2019. As the deadline for 2018/19 Tax Returns is 31 January 2020, it means that Gift Aid donations are only available for carry back if made by 31 January in the year following the tax year end, at the very latest.
Does making Gift Aid donations reduce my tax liability in other ways?
Yes – if your gross earnings are over £50,000, and you or your partner claim Child Benefit, you are required to pay the Child Benefit back (1% of the amount claimed in the tax year, for every £100 earned). For the purposes of the High Income Child Benefit Charge, trade losses, gross pension contributions, and gross gift aid donations are deducted from earnings to give a ‘net adjusted earnings’ figure, and it is this figure that is used to calculate the Child Benefit Charge, so if donations result in your net adjusted earnings being less than £50,000, you will no longer be required to pay any Child Benefit back.
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