Using gift aid when you donate to charity increases the amount it receives by adding tax relief. You can also benefit from tax savings. How can you maximise these?
Gift aid recap
As you probably know, when you make a donation to a charity through the gift aid scheme the payment counts as if you had deducted 20% basic rate tax from it. The deduction also serves as your basic rate tax relief, i.e. a donation of £80 is actually one of £100 less your basic rate relief of £20. So if you’re a basic rate taxpayer that’s usually the end of the matter, but if you pay higher or additional rate tax you can claim further relief.
Example. You give £400 to charity, i.e. £500 less £100 basic rate tax. You’re a 45% taxpayer and so are entitled to further relief of £125 (£500 x 45% = £225 less tax relief already received £100 = £125). If you’re Scottish higher rate taxpayer, the extra tax relief you get differs slightly compared with that in England and Wales.
No tax paid means no tax relief
There’s a little-known trap for gift aid payments if you don’t pay income tax that at least equals the tax you deducted from your donations.
Example. Jack and Jill are married. Jack is a higher rate (40%) taxpayer. Jill’s income is less than her tax-free allowances and so she pays no tax. Jill makes a gift aid donation of £800 from their joint bank account, i.e. £1,000 less £200 tax. She is not entitled to the relief as she hasn’t paid any tax. Jill is required to declare the over claimed tax relief and pay HMRC £200.
Tip. When making gift aid donations bear in mind the trap explained above. Also, to maximise tax relief as a couple, make sure that whoever pays tax at the highest rate makes the donation.
Extra gift aid relief
If you pay tax above basic rate, you can claim the extra tax relief on your gift aid donation by including the details on your self-assessment tax return. But if you don’t usually complete a return, it’s easy to overlook the extra relief. You should ask HMRC to send you a Form P810 so you can claim it.
If you pay tax under PAYE, you can ask HMRC to include the extra relief in your tax code. If you don’t do that then follow the P810 procedure. It’s reckoned that every year large sums of gift aid extra tax relief go begging because people don’t realise they can claim it or they forget to.
Tip. Every time a charity asks and you agree to gift aid a donation, keep a record for tax purposes so that you can claim the extra relief if you pay tax at higher rates. Remember too that some entry fees, e.g. to zoos and historical sites, can include a gift aid donation, which means you can get extra tax relief.
Even more tax relief
If you expect your taxable income for 2022/23 to be between £100,000 and £125,140, a gift aid payment will improve the tax relief by increasing your personal tax-free allowance. For every £80 you donate you’ll reduce your tax bill by £30 instead of the £20. Donations can also reduce your high income child benefit charge.
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.