How giving to charity can reduce your tax bill

Giving through Gift Aid

How Gift Aid works for an individual

The most common way people in the UK give to charity is by donating money. Giving through Gift Aid is a tax efficient way of making gifts or donations to UK registered charities and community amateur sports clubs (CASCs). It should be noted that since 15 March 2023, only certain Gift Aid donations to EU/EEA charities will qualify for Gift Aid under transitional rules which end on 5 April 2024 and will mean only donations to UK charities will qualify from 6 April 2024.   

Gift Aid can only be claimed on donations made by UK taxpayers, as Gift Aid is a repayment of the UK basic rate Income Tax (20%) a UK taxpayer paid on their gift. However, instead of the tax being repaid to the taxpayer, it’s repaid to the charity.  

Donating through Gift Aid means that charities and CASCs can claim an extra 25p for every £1 they receive. For example, if you donate £100 to charity, the cash sum will be deemed to be the amount received net of basic rate tax, i.e. gross income of £125 x 20% (basic tax rate) = £25 tax, resulting in a net donation of £100. If you pay Income Tax at the basic rate, no additional relief is due on your gifts.

Higher rate and additional rate taxpayers – extended tax thresholds 

Once you’ve made a Gift Aid declaration, your basic and higher rate tax bands are extended by the gross charitable donation, thereby increasing the proportion of your income taxed at the lower rates. 

For example, if you’re a higher rate taxpayer (40%) and you donate £100 to charity, your basic rate band is extended by £125. The charity claims the 20% tax from HMRC as usual; however, you also benefit from the donation due to the fact that £125 of income that would have been taxed at 40% is now taxable at 20%. The result is that you receive additional tax relief of 20% by paying less higher rate tax to HMRC. 

Similarly, if you’re an additional rate taxpayer (45%), your income tax relief increases to 25%. 

Even more relief for high earners (between £100,000 and £125,140 per year)

The tax-free personal allowance (£12,570 for 2023/24) reduces by £1 for every £2 of income above £100,000. However, Gift Aid donations extend the £100,000 threshold, such that the personal allowance is restored by £1 for every £2 of gross Gift Aid donations. The combined effect of the extended basic rate band and the restored personal allowance gives an effective rate of tax relief of 60%. 

The easiest and quickest way to claim relief is to complete a Self-Assessment Tax Return and include details of any Gift Aid donations made during the year. 

Accelerating tax relief

In your Self-Assessment Tax Return, you normally only report allowable expenses which were incurred during that particular tax year. 

But for Gift Aid, the options are much more flexible.  You have the choice to “carry back” any Gift Aid donations you make in the current tax year (up to the date you file your return) to the previous tax year to claim tax relief.  You might want to carry back if you either: 

• want tax relief sooner; or 
• your tax rate in the year you are filing (i.e. the previous tax year) will be higher than in the current year.

This means that you can make a claim for tax relief on your 2022/23 tax return for any Gift Aid donations you make up to and including 31 January 2024, if you file online (or 31 October 2023 if you submit paper tax returns).  

You cannot do this if:

• you miss the deadline (31 January 2024 for 2022/23 if you file online); or
• you’re filing an amended tax return; or 
• your donations do not qualify for Gift Aid. To qualify, your donations from both tax years together must not be more than four times what you paid in tax in the previous year.

Not paid enough tax? A word to the wise

An important point to keep in mind: when you make your Gift Aid declaration, you are stating that you will have paid enough tax during the year to cover the 20% tax that the charity will claim from HMRC. If it turns out that you haven’t paid enough tax, then you will have to make good the tax claimed by the charity via your Self-Assessment Tax Return.  

Those looking to donate to charity should proceed with caution to avoid any pitfalls. For example, you cannot claim Gift Aid on subscription fees that are later paid to a charity, or if you make a charitable donation and receive benefits from the charity that exceed the allowed limits which depends on the amount donated. 

Our experts can advise on the creation and administration of charitable trusts and giving through Gift Aid, and offer this as part of our wider estate planning service. For professional tax advice tailored to your unique circumstances, please fill out the form below and one of our specialists will be in touch to discuss your requirements and how we can help.