If you were a 50% taxpayer last year, there is still an opportunity to claim 50% tax relief on future charitable donations even though you now pay tax at the reduced top rate of 45% (or less). However, if you think you might make substantial charitable donations between now and next January, you should consider submitting last year's tax return as close as possible to the 31 January 2014 deadline.
Why? Because if you file last year's tax return before you make the gifts to charity, you will be unable to claim gift aid relief against last year's income.
When making gifts to charity, taxpayers can claim back the difference between the 20% basic rate and their marginal rate of tax. Since 6 April the top rate of tax has reduced from 50% to 45%, resulting in lower gift aid relief for top rate taxpayers. But you can still claim gift aid relief for this year's charitable donations against last year's income tax provided you make a "carry-back" election before you file last year's tax return. In cash terms, making this election will enable top rate taxpayers to claim back 37.5% of their charitable donation compared to just 31.25% if they claim gift aid for the current year.
For example, if a top rate 45% tax payer now gives £80,000 to charity and elects to carry-back the gift to last year, the charity claims back £20,000 and the donor can still claim back £30,000 in tax relief against last year's 50% tax. The charity ultimately receives £100,000 but it costs the donor just £50,000. The £30,000 refund represents 37.5% of his £80,000 donation. If instead the election is not made, the charity still claims back £20,000 and the charity still receives £100,000. However, the donor can now only claim back £25,000 in tax relief, which represents just 31.25% of his £80,000 donation. The charity still ultimately receives £100,000 but it costs the donor £55,000.
The opportunity to make the carry-back election only exists provided the taxpayer has not yet filed their tax return for the earlier year. The case of Cameron v HMRC in 2011 highlighted this point. In that case, Mr Cameron's tax liability in the year he made his donation was much smaller than the year before. He therefore wanted to use the carry-back option to benefit from full gift aid relief. Unfortunately Mr Cameron had already filed his tax return for the previous year before he made the large donation, so it was too late.
In effect, Mr Cameron was penalised for filing his tax return promptly. Gift aid can only be carried back to the previous tax year if the tax return for that year has not yet been filed.
If Mr Cameron had waited until the last minute to file his tax return, the gift aid carry back claim would have been allowed. To avoid this problem, and to take advantage of a one-off opportunity to claim additional gift aid relief, we recommend that you consider delaying filing your 2012/13 tax return until after you make any large charitable donations.