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Maximising the benefit of Gift Aid donations

Newsletter issue - February 2019.

The government's Gift Aid scheme aims to maximise the value of donations made to charities whilst allowing most UK taxpayers to benefit from tax relief on the gift. Since the scheme allows payments to be related to a previous year, the end of the tax year is a good time to give the matter a review.

The Gift Aid scheme allows individuals to claim tax relief on making one-off or regular gifts to charity and there are no lower or upper limits on donations. When a payment is made, it is treated as being made net of tax at the basic rate. So, if a basic rate taxpayer makes a donation of 100, the charity will be able to claim back tax of 25 from the government (125 being the 'grossed up' value of the payment). The charity gets 125, but it costs the donor only 100.

Higher rate taxpayers can claim 20% (the difference between the higher rate of tax at 40% cent and the basic rate of tax at 20%) as a tax deduction on the total value to the charity of the donation. So, on a gift of 100, the charity still receives 125, and the higher rate taxpayer reclaims 25 (20% of the gross donation of 125). The claim is usually made via the individual's self-assessment tax return.

It is worth noting that the basic rate tax deemed to have been deducted from a donation will be clawed back by HMRC if the donor's income tax and/or capital gains tax (CGT) liability for the year is insufficient to match the tax retained.

The person making a donation doesn't necessarily have to be working to be paying tax - tax deducted from pensions and/or income will also cover the tax on Gift Aid payments.

For tax planning purposes, for example, to reduce a liability to higher rate tax in a previous year, it is possible to elect for a donation to be treated as paid in the previous tax year. The election must be made to HMRC by the date on which the individual's tax return was submitted for the previous tax year and, in any event, no later than 31 January following that tax year. An election can only be made if the gift can be paid out of taxed income or gains of the previous tax year.

The election provisions may be particularly useful to someone whose income for a particular tax year nudges just over the higher rate income tax threshold. It may be possible to make a gift under Gift Aid, which in turn will reduce liability to tax at the higher rate, and mean that the taxpayer could potentially avoid paying tax at marginal tax rates of up to 64.75%.

It may be worth reviewing any donations made under Gift Aid to ensure that full entitlement to potential tax reliefs has been utilised.