Gift Aid is a scheme available to charities and community amateur sports clubs whereby any qualifying* donation made by an individual is increased by 25%. As well as the charity receiving this extra benefit from your donation, you are able to claim tax relief if you are a higher rate tax payer.
When can I claim?
Gift Aid payments are normally treated as being made in the tax year that they are actually made. However, Gift Aid payments made during the period from 6 April to 31 January can be treated as being made in the previous tax year, provided you make a claim by 31 January following the end of the previous tax year. If you are in Self-Assessment, the claim needs to be made on your Self-Assessment tax return for the earlier year. For example, if you make a Gift Aid payment on 31 December 2021 and want to treat it as being made in the 2020-21 tax year, you need to include the details on your 2020-21 Self-Assessment tax return and submit the return by 31 January 2022.
How much can I claim?
The golden rule of the Gift Aid scheme is that the donor needs to ensure that they have a tax liability (income tax and/or capital gains tax) that is at least as high as the tax element of the Gift Aid payment they have made. If the donor’s tax liability is not high enough, it is the donor who needs to pay additional tax in order to make good – the charity’s position is unaffected.
The tax element of the Gift Aid payment is calculated by treating the payment as being made net of tax at basic rate (20%), so the amount actually paid needs to be “grossed up”, with the tax element being the difference between the net amount actually paid and the gross amount. To illustrate:
If, on 1 March 2022, you make a net Gift Aid payment of £10,000, this is multiplied by 125% to calculate the gross amount of £12,500. The tax element is £2,500 and the charity is therefore able to claim an amount of £2,500 directly from HMRC. If your taxable income and capital gains for the 2021-22 tax year are high enough to generate a liability of at least £2,500, there is no problem, because the charity has not claimed more than your tax liability. However, if your income/gains are so low that you would otherwise have had a tax liability below £2,500, your tax liability is artificially increased to £2,500, so that you have paid the same amount that the charity has claimed. The charity’s position is unaffected by this adjustment, as they still have the original £10,000 net amount, plus the £2,500 received from HMRC.
How to calculate my tax liability?
When working out what your tax liability will be, you need to bear in mind that making Gift Aid payments extends the basic rate tax band (so that non-savings income is taxed at 20% rather than 40%, dividend income at 7.5% rather than 32.5% etc) and can also affect your entitlement to an income tax personal allowance (if your taxable income for the year is above £100,000). So, depending on the circumstances, the tax calculation can actually be very complicated, and it is worth getting in contact with us if you are unsure about how your donations will affect your tax liability.
How can this affect Inheritance Tax (IHT)?
This is much simpler. Lifetime gifts made to charities will always qualify for full exemption from IHT (regardless of the donor’s overall income position for the year), and they are ignored when calculating the IHT on lifetime gifts that don’t qualify for full exemption (i.e. Potentially Exempt Transfers or Chargeable Lifetime Transfers).
As every individual’s tax position will be different, it is important to seek professional advice to ensure you are getting the correct level of tax relief on any gift aid donations you make. Please get in contact with me or your Wenn Townsend contact to discuss further.
Matthew Hill, Trusts and Estates Tax Manager
*donations qualify as long as they’re not more than 4 times what the donor pays in tax in that tax year (6 April to 5 April)