Blog Search

Archives

Use Gift Aid to save tax

HMRC have recently highlighted that charities are collectively missing out on some £600m extra funding because a third of donations made do not add Gift Aid when they could have done so.

Broadly, Gift Aid allows charities and community amateur sports clubs (CASC) to claim an extra 25p for every £1 donated. To add Gift Aid to a donation, the donor must have paid income or capital gains tax that year worth at least the value of the Gift Aid being added, and must give the charity permission to claim it. Gift Aid costs no extra to add on to the donation.

For example, a basic rate taxpayer makes a gift of £100 to a charity under the Gift Aid scheme. The donation is treated as being made net of tax. The ‘grossed up’ value of the donation is £125 (£100 x 100/80), which means that the charity can claim back tax of £25 from the government. The charity therefore receives £125, but it has only cost the donor £100.

Taking this a step further, Gift Aid can be used to help reduce liability to higher, and even additional, rate income tax.

For example, a higher rate taxpayer makes a gift of £100 to a charity under the Gift Aid scheme. The charity receives £125, as above, but this taxpayer can also claim 20% (the difference between the higher rate of tax at 40% and the basic rate of tax at 20%) as a tax deduction on the total value to the charity of the donation. This means that the taxpayer can claim a further £25 higher rate relief (being 20% of his gross donation of £125) via his self-assessment return.

In arriving at adjusted net income for the purposes of calculating liability to income tax, a deduction is made for the grossed-up amounts of any Gift Aid donations paid. This is important because some reliefs and allowances are given, or withdrawn, by reference to the person’s adjusted net income. Such adjustments can have a significant impact on a donor’s income tax position. For example, where an individual’s total income is slightly above the abatement threshold for withdrawal of the personal income tax allowance (£123,700 in 2018/19), Gift Aid donations may help increase the amount of personal allowance available, and so save tax at 40% (for non-savings income), by making a Gift Aid donation. Gift Aid donations may also help in reducing liability to the high income child benefit charge where income levels are around £50,000 to £60,000.

It is possible elect for a donation to be treated as paid in the previous tax year. Therefore, it is worth checking at the end of each tax year, whether it would be beneficial to relate back any such payments. In particular, this may help to reduce a liability to higher rate tax in a previous tax year.

  • Latest news and testimonials

  • Latest News

    • September Q&A

      Q. I have two small businesses which are treated as a group for VAT purposes, so we only submit a single VAT return covering both …

      Read more
    • Making Tax Digital for Business: update

      In July, the Government confirmed that the Summer Finance Bill would be published in September, with the measures dropped from the pre-election Finance Bill being reintroduced …

      Read more
  • Testimonials

    • Partner – Solicitor

      I have worked with SBL over the last 10 years on numerous matters involving owner-managed business. They are professional, personable, knowledgeable and work incredibly hard to provide the best advice to their clients. I would have no hesitation in recommending SBL.

      Read more
  • Don’t hesitate to ask

    SBL are here to help. With accountancy advice and tax planning experts on hand to guide you and your business on the pathway to success! You can call us on 020 7580 6822, or email us on info@sblaccoutants.com or if you’d prefer you can complete our Free Online Enquiry Form and one of the team will be in touch shortly.

    Don’t hesitate to ask

    Don’t hesitate to ask section
    • This field is for validation purposes and should be left unchanged.

    By submitting my details on this form, I consent to being contacted by a member of the SBL Accountants team by email or telephone. Privacy Policy