City thinking, local knowledge

Using Your Gift Aid Tax Incentive

By Questa Chartered

How well do you know your Gift Aid tax benefits? For UK taxpayers donating to registered charities or community amateur sports clubs (CASC), Gift Aid is a valuable yet underutilised tax incentive. Although many have heard of Gift Aid, HMRC research shows that only 52% of higher earners aware of the rebate actually claim it. Even fewer—just 20%—actively do so.

How Gift Aid Works

Gift Aid allows the government to add 25% to your donation, reflecting the 20% basic rate income tax paid on the donated sum. For example, a £100 donation becomes £125 for the charity. But here’s where it gets interesting for higher and additional rate taxpayers: they can claim back the difference between their tax rate and the basic rate on their donations. This means higher rate taxpayers can claim an additional 20%, and additional rate taxpayers can claim an extra 25%.

The Impact of Gift Aid

Let’s break it down with some numbers:

Original Donation (Before Gift Aid) Total Received by Charity 40% Taxpayer Could Claim 45% Taxpayer Could Claim
£100 £125 £25 £31.20
£500 £625 £125 £156.25
£1,000 £1,250 £250 £312.50

These figures illustrate the substantial benefit Gift Aid provides, both to charities and to your own tax bill.

Tax Bands and Regional Differences

It’s important to note that tax bands and rates in Scotland differ from those in the rest of the UK. In Scotland, intermediate, higher, and additional rate taxpayers can all claim a rebate, unlike basic rate taxpayers who are ineligible for this benefit.

Claiming Gift Aid

To claim Gift Aid, you can use your self-assessment tax return or request a P810 form from HMRC if you don’t usually file a return. You can also backdate claims for up to four years, so if you’ve missed out in the past, there’s still time to correct it.

Navigating Tax Traps with Gift Aid

Gift Aid can also help you navigate tricky tax situations. For instance, if you’re affected by the high-income child benefit charge (HICBC) or have earnings above £100,000, making charitable donations and claiming Gift Aid can reduce your taxable income and thus your tax bill. This strategy is especially effective in lowering the income counted towards tax thresholds.

Consider this: a higher rate taxpayer donating £780 annually could receive £195 in tax relief from HMRC, reducing the actual cost of their donation to £585, while the charity receives £975. This effective reduction in taxable income can be particularly beneficial in managing your overall tax liability.

Missed Out? Here’s How to Fix It

If you’ve missed out on claiming a rebate, you can rectify this by contacting HMRC and providing records of your donations. Given the stagnant tax bands and the increasing number of individuals pushed into higher tax rates, unclaimed Gift Aid figures are likely higher than estimated.

Record Keeping

To ensure you maximise your Gift Aid claims, keep detailed records of all your donations. This is crucial for when you submit your tax returns. Detailed records will help you accurately report your donations and ensure you receive the correct amount of tax relief.

Final Thoughts

Utilising Gift Aid is not just about reducing your tax bill—it’s also about amplifying the impact of your charitable donations. By taking advantage of the tax relief available, you ensure that your chosen charities receive more support at no extra cost to you.

Remember, every pound you save through tax relief can be reinvested or donated further, enhancing both your financial health and your charitable impact. Don’t let this valuable tax incentive slip through your fingers; ensure you’re making the most of Gift Aid today.

Latest News

July Market Commentary

June 2024 was a significant month for global financial markets, marked by notable volatility and key economic developments. The interplay of geopolitical tensions, economic data releases, and central…

Pensions and Politics: What You Need to Know

Pensions have long been a focal point in UK politics and, perhaps even more so after an election, the spotlight on retirement savings has never been brighter. Pensions…

The Implications of the King’s Speech on Your Finances

The recent UK King’s Speech delivered by King Charles III on 17th July 2024, has set a clear path for the government’s legislative agenda. These new policies and…