“Would you like to Gift Aid it?”

When making a charitable donation, we’ve all heard the question “would you like to Gift Aid it?”, and most of us respond in the affirmative without hesitation.

However, how many of us have actually stopped to ask what we are really doing in agreeing to this question, and, more importantly, whether we have made this relief work not only in the charity’s favour, but also in our own?

What is Gift Aid?

Gift Aid is a scheme which was introduced in 1990 to encourage the giving of money to charities and Community Amateur Sports Clubs (although, for simplicity, this article will simply refer to charities).

When you make a cash gift to a charity and you agree to “Gift Aid” it, the gift for tax purposes will be presumed to have been received by the charity net of basic rate tax, and the charity receiving the donation, provided that they are recognised as a charity by HMRC, will be able to claim back from HMRC the value of the basic rate tax on the gross sum of the money donated.

This means that, as basic rate tax is currently 20 per cent, for every £1 donated to a charity which can claim benefit from the Gift Aid scheme, the charity receives £1.25.

It is worth noting that memberships, subscriptions and sponsorships may qualify for Gift Aid, as may bids at charity auctions and fund raising events, subject to certain conditions.

Making Gift Aid work for you

In addition to the warm glow which a Gift Aid donation can give a donor, the scheme also allows a higher or additional rate payer to claim tax relief on the difference between their rate of tax and the basic rate on the grossed-up donation. Below is a simple example with a gift of £100:

  • Higher rate payer (40 per cent) Charity receives £100 gift and claims back £25 tax from HMRC. The donor can claim £25 in relief (the difference between the basic and higher rate of income tax at 40 per cent) making the cost of the donation to the donor just £75 (£100 – £25).
  • Additional rate payer (45 per cent) Charity receives £100 gift and claims back £25 tax from HMRC. The donor can claim £31.25 in relief (the difference between the basic and additional rate of income tax at 45 per cent) making the cost of the donation to the donor just £68.75 (£100 – £31.25).

The Gift Aid scheme can also assist a donor if he/she is eligible for the Age- Related Personal Allowance, the Married Couple's Allowance or for tax credits, subject to the limits that apply.

This is because the value of the Gift Aid donation, plus the basic rate of tax on it, is a deductible amount from the total of your income before the level of the allowance or credit is calculated. So, the allowance or credit is calculated based on this reduced figure, and the value of the allowance or credit therefore increases.

Careful, there’s a catch...

Gift Aid is based on the principle that you have paid sufficient Income and Capital Gains Tax to cover the total value of the Gift Aid claimed by all the charities to which you have made donations in a particular tax year. If you have not paid sufficient tax, then HMRC will ask you to account for the difference!

Additionally, apart from the tax reliefs set out above, there are limits to the “valuable benefit” a donor can receive in return from a charity when making a gift subject to the Gift Aid scheme.  

If the limits are exceeded, this can limit the availability of the reliefs usually afforded by the Gift Aid Scheme.

A “valuable benefit” is any item or service associated with the donation, which is provided by the charity (or a third party connected to the charity) to the donor or a person connected to the donor.

A valuable benefit arises if:

  • The gift is not a payment of a sum of money
  • The payment is subject to repayment conditions
  • The payment is a donation under the payroll giving scheme
  • The payment is deductible in calculating the donor’s income
  • The payment is related to arrangements involving the acquisition of property by the charity from the donor (or persons connected to the donor)
  • Any benefits associated with the gift breach certain limits, which are set out below:

Despite the guidance provided by HMRC, “valuable benefit” is not always clear and some gifts might seem like they can be “Gift Aided” when they can’t – for example, funding a trip or excursion when someone you know is going on it will require an assessment as to whether Gift Aid is possible. Professional advice should be sought if there is any doubt.

What will the charity need?

You will need to complete a Gift Aid declaration for every donation given, or one to confirm a series of gifts. The only exception to the declaration rule is if HMRC has approved the charity for simplified procedure from 6 April 2013, whereby, certain charities will be able to claim Gift Aid on up to £5,000 of cash gifts (with individual gift limits of £20) without a declaration; however for most charities, a declaration will be required.

What should you do?

If you are a higher rate tax payer, or receive the allowances and tax credits mentioned earlier in this article, then you should let HMRC know about your “Gift Aided” donations in your annual tax return, so as to benefit from the reliefs available, or an increased level of allowance or tax credits.

If you haven’t paid enough tax in the tax year in which the gift was made, you can carry back the donation as if it was paid in the previous tax year, but the request to carry back the donation must be made at the time of submitting your tax return for the tax year in question.

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