Making Gift Aid donations

Ben Carter, Director, Professional Practices

Important points for partners to be aware of regarding charitable donations and tax

Making charitable donations under Gift Aid is a win-win for all involved. By signing a declaration or ticking the Gift Aid box, the charity is able to claim an additional 20% from the government while higher and additional rate tax payers will benefit from 20% or 25% tax relief.

Further tax relief is available for those falling within the 60% tax bracket.

How it works

If you donate £100 to a charity under Gift Aid, the charity can claim back 25% of the donation from the UK tax authorities, which in this case, is £25. Therefore, the charity will receive £125 in total.

What tax relief will be due on a £100 donation under Gift Aid?

Taxpayer	Marginal rate of tax	Tax relief due	Reduction in tax liability	Cost of donation
Basic	20%	0%	£0	£100
Higher	40%	20%	£25	£75
Additional	45%	25%	£31.25	£68.75
Tax trap¹	60%	40%	£50	£50

*The 60% rate of tax is implacable for those with income falling in the band £100,000 to £125,140, due to the loss of their personal allowance.

If you are not a UK taxpayer or pay tax less than the amount claimed back by the charity then you will need to pay HMRC the difference.

Saving your personal allowance

As highlighted above, those who have income between £100,00 and £125,140 will be paying tax at a rate of 60%. One way to mitigate this is to make Gift Aid payments that will reinstate some or all of your personal allowance.

An example

If you have income of £110,000 your personal allowance will be reduced by £5,000.
A donation of £8,000 to a charity under Gift Aid would be grossed up to £10,000.
The gross donation would be deducted from your income reducing the amount to £100,000 and fully reinstating your personal allowance.
This would generate a tax saving of £4,000.
The donation would have cost you in effect £4,000 but the charity would have received £10,000.

Being tax efficient with your donations

When making charitable donations it is important to look at the family unit and consider who should be making the donation; ideally, the individual suffering tax at the highest rate. The donation is then made in the most efficient manner.

Tax relief can be maximised by ensuring that the higher tax payer is making the Gift Aid payments. For example, if someone in the family is a 20% tax payer and someone else pays tax at 40%, then the individual paying tax at 40% should make the payment under Gift Aid as they will be due tax relief of 20%.

If you would like more information on the issues discussed in this article or to discuss your individual circumstances, get in touch with Ben Carter or your usual Crowe contact.