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Tax and VAT Gift Aid

Gift Aid: How giving to charity can reduce your tax bill

Donating to your favourite charities can have a feel-good effect but did you know that your generosity could also potentially reduce your tax bill? Akin Coker from Buzzacott explains how.

Creating a charitable trust

As a settlor, setting up a charitable trust will enable you to focus on the causes that matter most to you and have the satisfaction of knowing your philanthropic goals are met, while also benefiting tax-wise.

However, for tax benefit the charitable trust must be able to prove it is for a charitable purpose and for the public benefit. A few examples of what constitutes a charitable purpose are the prevention or relief of poverty, the advancement of education, the advancement of religion, advancement of amateur sport.

If you set up a charitable trust, whether in your lifetime or on death by your will, you’ll benefit from not paying Inheritance Tax on your gift.

In addition, on death, where more than 10% of your estate is left to a charity (including charitable trusts) the rate of Inheritance Tax on your taxable estate is reduced from 40% to 36%.

Any payments made from income can be paid under the Gift Aid scheme (see below), which will benefit you as the settlor, as well as the charitable trust.

The charitable trust, when established, will be exempt from paying all taxes - Income Tax, Capital Gains Tax, Inheritance Tax, Corporate Tax and Stamp Duty and, as mentioned above, you can claim the tax on gifts made through Gift Aid from HMRC, which is an extra 25p for every £1 donated.

Giving through Gift Aid

How Gift Aid works for an individual

The most common way people in the UK give to charity is by donating money. Giving through Gift Aid is a tax efficient way of making gifts or donations to UK registered charities and community amateur sports clubs (CASCs).

It should be noted that since 15 March 2023, only certain Gift Aid donations to EU/EEA charities will qualify for Gift Aid under transitional rules which end on 5 April 2024 and will mean only donations to UK charities will qualify from 6 April 2024.

Gift Aid can only be claimed on donations made by UK taxpayers, as Gift Aid is a repayment of the UK basic rate Income Tax (20%) a UK taxpayer paid on their gift. However, instead of the tax being repaid to the taxpayer, it’s repaid to the charity.

Donating through Gift Aid means that charities and CASCs can claim an extra 25p for every £1 they receive. For example, if you donate £100 to charity, the cash sum will be deemed to be the amount received net of basic rate tax, i.e. gross income of £125 x 20% (basic tax rate) = £25 tax, resulting in a net donation of £100. If you pay Income Tax at the basic rate, no additional relief is due on your gifts.

Higher rate and additional rate taxpayers – extended tax thresholds

Once you’ve made a Gift Aid declaration, your basic and higher rate tax bands are extended by the gross charitable donation, thereby increasing the proportion of your income taxed at the lower rates.

For example, if you’re a higher rate taxpayer (40%) and you donate £100 to charity, your basic rate band is extended by £125. The charity claims the 20% tax from HMRC as usual; however, you also benefit from the donation due to the fact that £125 of income that would have been taxed at 40% is now taxable at 20%. The result is that you receive additional tax relief of 20% by paying less higher rate tax to HMRC.

Similarly, if you’re an additional rate taxpayer (45%), your income tax relief increases to 25%.

Even more relief for high earners (between £100,000 and £125,140 per year)

The tax-free personal allowance (£12,570 for 2023/24) reduces by £1 for every £2 of income above £100,000. However, Gift Aid donations extend the £100,000 threshold, such that the personal allowance is restored by £1 for every £2 of gross Gift Aid donations. The combined effect of the extended basic rate band and the restored personal allowance gives an effective rate of tax relief of 60%.

The easiest and quickest way to claim relief is to complete a Self-Assessment Tax Return and include details of any Gift Aid donations made during the year.

Accelerating tax relief

In your Self-Assessment Tax Return, you normally only report allowable expenses which were incurred during that particular tax year.

But for Gift Aid, the options are much more flexible. You have the choice to “carry back” any Gift Aid donations you make in the current tax year (up to the date you file your return) to the previous tax year to claim tax relief. You might want to carry back if you either:

  • want tax relief sooner; or
  • your tax rate in the year you are filing (i.e. the previous tax year) will be higher than in the current year.

This means that you can make a claim for tax relief on your 2022/23 tax return for any Gift Aid donations you make up to and including 31 January 2024, if you file online (or 31 October 2023 if you submit paper tax returns).

You cannot do this if:

  • you miss the deadline (31 January 2024 for 2022/23 if you file online); or
  • you’re filing an amended tax return; or
  • your donations do not qualify for Gift Aid. To qualify, your donations from both tax years together must not be more than four times what you paid in tax in the previous year.

Not paid enough tax? A word to the wise

An important point to keep in mind: when you make your Gift Aid declaration, you are stating that you will have paid enough tax during the year to cover the 20% tax that the charity will claim from HMRC. If it turns out that you haven’t paid enough tax, then you will have to make good the tax claimed by the charity via your Self-Assessment Tax Return.

Those looking to donate to charity should proceed with caution to avoid any pitfalls. For example, you cannot claim Gift Aid on subscription fees that are later paid to a charity, or if you make a charitable donation and receive benefits from the charity that exceed the allowed limits which depends on the amount donated.



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