If for any reason your income is unusually low for a tax year you would expect to pay less tax than usual. However, an extra tax bill can apply if you continue to make Gift Aid payments. How can you avoid it?

Enough tax

As you probably know, under the Gift Aid scheme charities and community amateur sports clubs can claim 25p extra for every £1 they receive in donations. They get this by reclaiming the 20% basic rate tax you deducted (probably without realising it) from your donations. Normally, when you collect tax from a person or organisation you have to pay it to HMRC, but usually the books are balanced because you’re entitled to tax relief for Gift Aid donations.

Trap. If you don’t pay tax (income and capital gains tax) at least equal to the amount you deducted from your Gift Aid donations, you’ll owe HMRC the difference.

Tip. Conversely, if you pay higher or additional rate tax (intermediate, higher or top rate tax for Scottish taxpayers), you can claim extra tax relief on Gift Aid payments.

Gift Aid procedures

Before the charity can reclaim the tax you withheld from your donation it needs you to declare that you pay UK tax. This is why charities ask you if you want to Gift Aid your donation. Your declaration can be used to cover future donations, and those made in the last four year so you need to be aware of the consequences. For example, if your taxable income has reduced significantly you should check that you’ve paid enough tax to cover that which you deducted from your donations.

How much tax is enough?

To work out if you have enough to cover your giving, total up all your donations in the tax year. Divide the total by four. Compare this with tax paid. It’s possible you made a joint Gift Aid declaration with your spouse or civil partner. In that case, treat half of the donation as yours and half theirs. They should also check their Gift Aid position if they think they are at risk.

Tip. When totalling gifts, remember some visitor attractions operate Gift Aid on admission fees. Don’t overlook these.

Example. You gave five £130 gifts to a medical charity (total £650) and sponsor an assistance puppy for £125 per month (£1,500 p.a.). You paid Gift Aid admission to four gardens (£44 of which represents donations). Total donations £2,194. Divide by four = £548.50. If you have paid at least £548.50 tax this year, you’re in the clear.

Changing plans

If the figures are too close for comfort, in some circumstances you can make an election to have a donation made one tax year treated as if it were made in the previous one. But the rules are tricky, so read these first.

Tip. Alternatively, you can cancel your Gift Aid declaration at any time. If you think you haven’t enough tax to cover your donations, it’s up to you to notify the charity. There’s no set way of doing so. HMRC says you can make a notification “in any convenient way”. Cancellation usually takes effect from the date you notify the charity, but you could specify a future date.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.