Gift Aid is a way for charities or Community Amateur Sports Clubs (CASCs) to increase the value of monetary gifts from UK taxpayers by claiming back the basic rate tax paid by the donor. It can increase the value of donations by a quarter at no extra cost to the donor. Gift Aid is worth nearly £1 billion a year to charities and their donors.

Tax relief for charities

Gift Aid is an easy way to help your charity or CASC maximise the value of its donations, as you can reclaim tax from HM Revenue & Customs (HMRC) on its ‘gross’ equivalent – its value before tax was deducted at the basic rate. This is 20 per cent from 6 April 2008. You can work out the amount of tax you can reclaim by dividing the amount donated by four. This means that for every £1 donated, you can claim an extra 25 pence.

In addition, HMRC will automatically pay your charity or CASC a further three pence for every pound donated on or before 5 April 2011. This ‘transitional relief’ – to adjust to the fall in basic rate tax (from 22 per cent to 20 per cent) – is available on Gift Aid donations made from 6 April 2008 until 5 April 2011. This means that for every £1 donated, your charity or CASC can receive 28 pence, so the total value of the donation is £1.28. To receive ‘transitional relief’ the Gift Aid claim must be made within two years after the end of:

  • for charitable trusts, the tax year to which the claim relates
  • for charitable companies and CASCs, the accounting period to which it relates

Tax relief for donors

If a donor is a higher rate taxpayer, they too can benefit from tax relief as they can claim back the difference between the higher rate of tax at 40 per cent or 50 per cent and the basic rate of tax at 20 per cent on the total value of the donation – a total of 20 per cent and/or 30 per cent. So if £1 was donated, the gross donation would be £1.25, so a donor liable at the 40 per cent tax rate could claim 25 pence back (20 per cent of £1.25).

The donor must pay at least as much UK tax (Income Tax and/or Capital Gains Tax) as the amount of Income Tax that you’re reclaiming. If a donor makes a number of Gift Aid donations, they must pay a sufficient amount of UK tax on the total amount of those donations and they may be required to pay any shortfall in tax paid to HMRC. You must advise the donor of their tax requirement and keep a record of your notification along with the donor’s confirmation – known as a Gift Aid declaration.

Example

John is a 40 per cent higher rate taxpayer and donates £100 to charity. As he pays regular Income Tax on his earnings, the basic rate of tax on his donation has already been covered by his tax payments and the charity claims back the basic rate tax of 20 per cent from HMRC. So the charity is able to make a repayment claim of £25 (£100 divided by 4) and HMRC will add an additional transitional relief of £3, making a total payment of £28.

As a higher rate taxpayer, John can claim the difference between the higher rate of tax at 40 per cent and the basic rate of tax at 20 per cent on the total value of his donation, so he can claim 20 per cent of £125, a total of £25.