This year, the Gift Aid scheme will celebrate its 35th birthday. The scheme has been an incredible success, now raising upwards of £1.6bn each year. By now, you will surely be familiar with the concept – for every £1 you donate to charity, the charity can claim an extra 25% (or 25p) from HMRC.
This comes at no additional cost to you, as long as you’ve paid enough income and capital gains tax to cover the amount reclaimed.
However, what many people don’t realise is that higher-rate taxpayers can get an additional benefit from their charitable donations.
How does Gift Aid work for higher-rate taxpayers?
Where possible, all taxpayers should “Gift Aid” their donations to charity to provide additional benefit to the charity. However, higher-rate taxpayers can obtain additional tax relief on the gross value of their donation (i.e. after applying Gift Aid).
Let’s say your annual income exceeds the basic rate threshold of £50,271, and, therefore, you are a higher-rate taxpayer. If you make a £20 cash donation to charity and confirm that the donation is eligible for Gift Aid, the charity can claim a further £5 from HMRC, making a gross gift of £25.
Now, as you fall into the higher-rate tax bracket, you can claim back the difference between the higher rate (40%) and the basic rate (20%) on the gross donation. For a £25 gross donation, this equates to £5:
- Initial donation: £20
- Gross donation with Gift Aid: £20 + (£20 * 25%) = £25
- Higher-rate taxpayer relief: £25 * (40% – 20%) = £25 * 20% = £5
You can claim this as a tax refund via your annual self-assessment tax return or as an adjustment to your tax code.
However, here’s the important part: you must make a declaration that you are a UK taxpayer, and you must have paid enough tax to cover the Gift Aid claimed by charities on your donations. If you’ve not paid enough, you will be taxed on the shortfall.
Finally, remember that Gift Aid does not just apply to cash donations. Many charity shops will now sell donated items on your behalf and can treat the sale proceeds as Gift-Aided donations.
Can charities claim Gift Aid on donations from companies?
If you’re a business owner and you’re wondering whether a charitable donation from your company is eligible for gift aid, the short answer is no. The Gift Aid scheme only applies to donations made by individuals.
Don’t let this put you off, though. Charitable donations made by companies qualify for corporation tax relief, effectively reducing your tax bill.
Just bear in mind that, while the charity receives the donation amount in full, there’s no additional top-up from HMRC. So if you’re trying to decide whether to make a charitable gift from your personal account or your company, you may want to compare the impact of each option on your personal and corporate tax liabilities, plus the gross amount your chosen charity will receive.
Need more information?
Do you need further help with Gift Aid or other forms of tax relief as a higher-rate taxpayer?
Our team can help. We’re a firm of trusted, chartered accountants, based in Manchester. We’ll support individuals and businesses with everything from end-of-year accounting to effective tax planning. For more information, please don’t hesitate to contact us via our website or by calling 0161 962 1855.