Gift Aid is a UK tax incentive that allows UK charities to reclaim an additional 25% in tax on eligible charitable donations made by UK taxpayers, so for every £1 you donate to charity, the charity can claim 25p. This grosses the donation up to £1.25.
This is because Gift Aid donations are treated as having been paid from your income after 20% basic rate tax has been deducted. Gift Aid can only be claimed on donations made by UK taxpayers.
In order that the charity can reclaim the tax, the donor actually has to cover the tax amount, so if the donor has paid less tax in the year than the Gift Aid amount they are claiming, the donor will need to pay the difference to HMRC.
Not only does Gift Aid boost donations to UK charities, it can also potentially save you tax. Higher and additional rate taxpayers pay tax at a rate of 40% or 45%, so they are entitled to claim for the difference between their top rate of tax and 20% basic rate.
For example, say a higher rate taxpayer donates £100 to charity, the charity will claim back £25 on the donation, and the taxpayer can claim a further £25 from HMRC (being 40% of the grossed up donation of £125, less the 20% already claimed by the charity).
No further relief is available for those paying tax at the basic rate.
Relief can be claimed either on your self-assessment tax return, or you can request that HMRC update your tax code.
The effect of the donation is to extend the basic rate band by the grossed up donation amount, meaning you would pay more tax at 20% and less at 40%/ 45%.
For higher and additional rate taxpayers, there may even be further scope for relief, e.g. if they are subject to the high income child benefit clawback, or if their personal allowance in abated because their income exceeds £100,000.
The current personal allowance is £12,500 (for the 2019-20 tax year), and those with income in excess of £100,000 lose £1 of personal allowance for every £2 of adjusted net income over £100,000. The effect of Gift Aid donations is to restore the personal allowance by £1 for every £2 donated via Gift Aid. So not only is the personal allowance restored, the basic rate band is also extended, the combined effect of which produces an effective rate of tax relief of 60%.
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