The Gift Aid Scheme

Taxpayers often make charitable donations which are either made via a payroll giving scheme in which case the donation will come off the person’s salary before income tax is deducted or as a general donation after paying tax.

In the case of the latter, taxpayers might actually be entitled to tax relief when filing their self-assessment and this can be a considerable sum depending upon the amount donated and the kind of taxpayer one is-basic rate, higher rate, or additional rate. Missing out on this can relief has proven costly to many since research suggests almost half of those who donated money to charity didn’t claim tax relief via the Gift Aid scheme.

How does the Gift Aid scheme operate?

Charities are entitled to claim back tax donors have paid prior to their donations at the rate of 25 pence for every £ donated. This indirectly supercharges your donations without costing you anything extra. Suppose you donated £100 to charity, after the 25p per £ claim done by the charity, the charity will effectively have received £125 which equates to the pre-tax donation of the individual.

This is since 20% of £125 is £25 which is exactly how much the charity is entitled to claim back from HMRC.

However, 20% is levied on basic rate taxpayers, the income tax rate paid by higher rate taxpayers amounts to 40% and 45% for additional rate taxpayers. For clarity, individuals earning under £50270 as of 2021-22 tax year are termed as basic rate taxpayers whilst those earning between £50270 and £150,000 are classified as higher rate taxpayers and those earning above £150,000 are additional rate taxpayers.

Higher rate taxpayers can claim the difference between 20% and 40% (or 45% for additional rate) when filing their self-assessment.

Suppose you are a higher-rate taxpayer and choose to donate £1000 to charity. The charity will claim back £250 (25p*£1000=£250) which boosts the donation to £1250. Since you pay the rate of 40% for income tax, the difference between the rate claimed back by the charity (20%) and the rate you pay (40%) is 20%. Thus, you are able to claim back the remaining 20% on the gross donation of £1250 which equates to £250.

In the case of additional rate taxpayers, the difference is 25% (45%-20%). This would imply a reclaim of £312.5(25%*1250).

Individuals are entitled to claim back tax relief on donation up to 4 years from the current tax year (inclusive of the current tax year in question).

To stay up to date with the latest information regarding pensions, tax, audit and other guidance from the government or HMRC, join Cheylesmore Accountants to ensure your business’s accounts are clear of penalties and inaccuracies. Feel free to give us a call today to discuss how we can support and grow your business to allow you to focus more on what matters most to you and leave the number-crunching to us.