If you wish to make charitable donations, do so under ‘gift aid’. Providing you are a taxpayer, this will result in tax benefits to the charity and to yourself.
HOW GIFT AID WORKS
The gift aid scheme is for gifts of money by individuals who pay UK tax. Gift aid donations are regarded as having basic rate tax deducted by the donor. Charities take your donation which is money you have already paid tax on – and reclaim the basic rate tax from HMRC on its ‘gross’ equivalent – the amount before basic rate tax was deducted.
Basic rate tax is 20% so this means that if you give £ 10 using gift aid, it’s worth £ 12.50 to the charity.
GIFT AID YOUR DONATION
In order to make a gift aid donation you will need to make a gift aid declaration. The charity will normally ask you to complete a simple form – one form can cover every gift made to the same charity for whatever period you choose, and can cover gifts you have already made and / or gifts you may make in the future.
This is income tax or, for companies, corporation tax relief for charitable donations. Basic rate income tax is deducted by the donor and reclaimed by the charity. The donor obtainsfull tax relief at the higher or additional rate.
Similarly a company deducts the gross donation from its taxable profits and obtains relief at its corporation tax rate (28% etc.).
Thus, suppose you give under ‘gift aid’ £ 1,000 gross to a charity during 2010-11, you deduct 20% basic rate and pay £ 800, the charity reclaiming the £ 200. You will also obtain £ 200 or £ 300 further relief if you are a higher rate or additional rate income tax payer. Your net cost will then be £ 600 or
£ 500 respectively.
MAKE SURE YOU HAVE PAID ENOUGH TAX
You can use gift aid if the amount of income tax and / or capital gains tax you have paid in the tax year (6th April one year to 5th April the next) in which you make your donation is at least equal to the amount of basic rate tax the charity is reclaiming on your gift. If you make a number of gift aid donations, you will need to consider the tax you have paid on each donation on an accumulative basis. If you don’t pay enough tax you may be required to pay any shortfall in tax to HMRC.
WHAT IS TAXABLE INCOME
You don’t necessarily have to be working to be paying tax. Apart from tax on income from a job or self-employment, the tax you have paid could include:
Tax on State Pension and / or other pensions
Tax on investment or rental income
Capital Gains Tax on gains
But only UK tax counts, so if you only pay tax outside the UK you won’t be able to use gift aid.
To work out if you have paid enough tax to cover your donations, divide the donation value by four. For example if you give £ 100 in a particular tax year you will need to have paid £ 25 tax over that period. (note that this calculation is based on the basic rate of 20%).
If you don’t think you have paid enough tax this year, you may be able to carry back your donation to the previous tax year.
TELLING H.M.R.C ABOUT YOUR GIFT AID DONATIONS
It is important to keep a record of the total amount of your gift aid donations for each tax year.
You will need to let HMRC know about your gift aid donations if:
You claim age-related personal allowance, married couple’s allowance or tax credits
You pay higher rate tax
You want to carry back a gift aid donation
If you normally complete a tax return you can tell HMRC about your gift aid donations by completing the section on gift aid payments.
If you don’t complete a return, you can give the details on form P810 Tax Review – available from
your Tax Office, or telephone your Tax Office and ask them to make a change to your tax code.
H.M.R.C. CHARITIES HELPLINE
For more help you can contact the Charities Helpline on Tele 0845 302 0203 .