For many years the Government has been committed to creating and sustaining an environment which offers tax incentives to individuals to make gifts to charities. There are several tax efficient ways in which an individual can give to charity and one of the most common is cash under the Gift Aid scheme.
Gift Aid
Gift Aid for charities or Community Amateur Sports Clubs (CASCs) applies to any monetary qualifying donation, whether large or small, regular or one-off.
Tax relief for donors
In making a gift under the Gift Aid scheme, the donor is deemed to have deducted income tax at the basic rate before making the gift. Thus, where the donor makes a Gift Aid donation of £100 when the basic rate of income tax is 20%, the donor is deemed to have made a “gross” donation of £125 out of which they have deducted £25. If the donor is a higher- or additional-rate tax payer, further tax relief is obtained via their self assessment tax return on the gross donation, at the difference between their marginal tax rate and the basic rate of tax. This is done by extending the basic rate tax band by the amount of the gross donation. Therefore, if for the year of donation the basic rate of tax applied to income up to £31,785 (i.e. the threshold for tax year 2015/16), a gross donation of £125 would extend this to £31,910.
Assuming that the basic rate of tax is 20% and the higher rate is 40% for the year of donation, the amount of higher rate relief on a gross donation of £125 is £25 (i.e. 40% less 20%). The combination of tax deducted at source and higher rate relief via the self assessment tax return means that a gross donation of £125 has actually cost a donor who is a higher rate taxpayer only £75, as shown below:
| Gross donation | £125.00 | |
| Tax deducted at source | (20%) | (£25.00) |
| Higher rate tax relief | (40% – 20%) | (£25.00) |
| Net cost to donor | £75.00 |
For those individuals who are liable to income tax at 45% on taxable income in excess of £150,000, the tax relief is more generous. In these circumstances, a gross donation of £125 will cost the donor £68.75 as the following calculation illustrates:
| Gross donation | £125.00 | |
| Tax deducted at source | (20%) | (£25.00) |
| Higher rate tax relief | (45% – 20%) | (£31.25) |
| Net cost to donor | £68.75 |
Note: The donor must pay at least as much UK tax (whether income tax and/or capital gains tax) as the amount of income tax relief that they are reclaiming through the Gift Aid scheme.
“Carry back” election
A donor may elect to treat a Gift Aid donation as having been made in the tax year immediately prior to the year in which the donation is made. The time limit for making the carry back election is the later of the date on which the self assessment tax return for the previous year is filed or 31st January in the tax year in which the donation is made.
Tax Benefit for Charities
Using the above example of a £125 “gross” donation, the charity or CASC received a net sum of £100 from the donor. The charity or CASC is then entitled to reclaim from HM Revenue & Customs (HMRC) the basic rate tax which the donor deducted at source (£25) so that in aggregate it receives the full amount of the gross donation (£125).
Donations that qualify for Gift Aid
Gift Aid can be claimed on gifts of money from individuals, sole traders or partnerships. The gift can be made in the form of cash, cheque, direct debit, credit or debit card, postal order, standing order or telegraphic transfer.
The following gifts however do not qualify for relief under the scheme:-
- Donations of money from a company (although there is a similar corporation tax relief from which they can benefit)
- Donations in the form of a loan waiver or debt conversion
- Gifts made on behalf of other people
- Gifts with conditions attached about repayment
- Gifts with certain enforceable conditions about how the money is used
- Payment received in return for goods or services
- Gifts where the donor receives an associated benefit in excess of the permitted limits (see below).
Providing benefits in return for donations
If any donor benefits significantly from their donation, then the donation will not qualify for Gift Aid. However, within limits, the charity/CASC can give donors modest, low value benefits as a token of appreciation. These limits are:
- For donations up to £100 the value of the benefit must not exceed 25% of the donation;
- For gifts between £101 and £1,000 the value of the benefit must not exceed £25; and
- For donations over £1,000 the value of the benefit must not exceed 5% of the donation, or a maximum of £2,500.
Benefits received need to be valued from the point of view of the recipient, rather than the cost to the charity providing the benefit, and some benefits are overlooked: normally printed materials, newsletters and reports are excluded, and naming rights or recognition for donors acknowledge their gift also normally have no attributable value. There is an additional exemption to the benefits rules which can apply to certain rights of admission to historic houses and other properties.
Claiming the tax back on Gift Aid donations
A donor does not have to register to claim Gift Aid but the charity must be recognised by HMRC as a charity for tax purposes. The charity/CASC must nominate a signatory/claimant who can claim and receive money from HMRC.
Gavin McEwan | 12th February 2016