From April 2024 taxpayers will need to review if their charitable donations are going to UK or non-UK charities: legislative changes mean gift aid has now been restricted to UK charities only.
Gift aid can help ‘restore’ a personal allowance where a taxpayer earns above £100,000.
Individuals may wish to re-assess their charitable donations ahead of the April 2024 deadline to ensure that they are giving in the most tax efficient manner.
Gift aid exists to encourage individuals (which includes partnerships and sole traders) to make charitable donations.
Many taxpayers give to charity (or community amateur sports clubs, which also qualify for gift aid) from a purely altruistic perspective, but by properly utilising gift aid they can make their gift go further, boosting the value of what they give to the charity of their choice as well as potentially obtaining an element of tax relief themselves.
When a gift is made, gift aid means the charity is able to claim back the basic rate of tax that the taxpayer paid on the gift, while the taxpayer, if a higher or additional rate taxpayer, can claim relief on their gift.
This allows the charity to benefit from more than the value of the gift, without the taxpayer having to give more.
Example 1: Paul
Paul, a basic rate taxpayer, gifts £1,000 to an eligible charity in January 2023. He completes all the necessary procedural formalities for gift aid to apply to his gift. The basic rate of income tax at the time of Paul’s gift is 20%.
The charity can claim back the basic rate tax that Paul paid on the gift. This is done by multiplying the gift (in this case, 1,000) by (100/80).
The gross sum is £1,250, so the charity can claim a further £250 from HMRC, i.e. the equivalent to Paul making the gift out of his pre-tax income and not suffering tax upon it.
Equally, the taxpayer can, if they are a higher or additional rate taxpayer, benefit from tax relief themselves, which can, potentially, be carried back to a previous tax year.
Example 2:
Jai, a higher rate taxpayer, donates £5,000 to an eligible charity in January 2023, complying with all requirements to allow the gift to be eligible for gift aid.
The charity reclaims the basic rate of tax as it did for Paul’s gift in example 1.
5,000 x (100/80) = £6,250, so the charity claims a further £1,250.
The grossed-up amount contributed is £6,250, so Jai claims higher rate relief by multiplying £6,250 by 20%, thereby getting £1,250 of relief.
Therefore, overall:
the charity gets £6,250;
Jai pays £5,000 and benefits from £1,250 of tax relief, meaning that the true cost of the gift to him was £3,750;
the remaining £2,500 of the gift comes from HMRC.
In total, Jai contributes 60% of the gift while HMRC contributes 40%
