This note is designed to illustrate simply how HM Revenue & Customs operates the Gift Aid system for the benefit of UK registered charities, as well as how it benefits you. If you are a UK taxpayer and make a gift to a charity, every £1 of that gift is treated as paid from income that has already been taxed by the time it reaches your pocket. The assumed rate is at least 20%, the basic rate. The Gift Aid system, which has been in force since April 2000, enables any gift to charity made by an individual out of taxed income or capital gains to be topped up by a direct refund by the Revenue to the charity of the tax you paid in the past (before it reached your pocket) on the amount given. If you follow some basic steps, the charity gets more than you lose from your wallet; the tax refund goes straight to the charity.
By way of an example, if you give £100 to a charity collector in the street without taking any further steps, the charity will receive exactly £100; the Revenue keeps the tax you paid to get the £100 in the first place. If however as a basic rate taxpayer you decide to make that £100 donation a Gift Aid donation, your £100 will swell to become £125 in the charity's hands with the £25 uplift representing the refunded tax. If you pay more tax, both you and the charity can benefit. All it costs you is a bit of extra effort in signing a simple form with some basic personal details.
You can calculate the amount of tax the charity will reclaim using the following formula:
Amount of gift x 20/(100-20)
So, the charity reclaims from the Revenue 20/80ths of your gift. Given the minimal administrative effort involved, there is no reason not to make full use of the process if you and the charity qualify and you should make a mental note to volunteer for Gift Aid at every opportunity.
Transitional relief has been introduced to allow charities to adjust to the reduction in the basic rate from 22% on 6 April 2008. The relief gives charities an extra three pence for every £1 donated for Gift Aid donations made from 6 April 2008 to 5 April 2011. Thus for every gift of £100 made, the charity can claim an additional £28 which brings the total of the gift to £128.
HOW CAN I GIFT AID MY DONATION?
You just need to make a simple Gift Aid declaration, normally in writing, to the charity: the system presupposes you paid tax in the first place, so it only works if the Revenue is sitting on that tax. You therefore need to be sure that you do pay enough tax (for example through your bank, stockbroker or employer) to cover the amount reclaimed from the Revenue. The declaration should give the charity
- your full name;
- home address;
- something that identifies which charity you are giving to; and
- an acknowledgement that you are aware of the requirement to have paid enough tax.
This can be done in writing, over the phone or online - click here
to download the relevant form. The charity then claims back the basic rate tax you have already paid. You don't have to do anything more. These declarations are often available from the charity on pre-printed forms, tear-off slips or even the back of appeal envelopes.
WHAT IF I AM A HIGHER RATE OR TOP RATE TAXPAYER?
Even if you are a higher rate or top rate taxpayer, the charity to which you Gift Aid your donation can only ever claim back the basic rate tax attributable to that gift. You have 4 years from the end of the tax year (if a charitable trust) or from the end of the accounting period (if a charitable company) during which the donation was made in which to make a Gift Aid claim.
You, however, can go on to reclaim from the Revenue the difference between the basic rate tax (20%) and the higher rate tax (40%) or top rate tax (50%) on your donation. This amounts to 20% (for higher rate tax payers) or 30% (for top rate tax payers) of the total received by the charity (i.e. what you gave + the basic rate tax refund). Since April 2003, higher rate taxpayers have been able to claim this back via their Self Assessment tax return for the previous year. In the example above of a gift of £100, which means £125 to the charity, you can ask the Revenue to refund you a further £25. The gift therefore would have cost you £75 (if a higher rate tax payer) or £62.50 (if a top rate tax payer) by the end of the process. To recap, for your outlay of £75 (if a higher rate tax payer) or £62.50 (if a top rate tax payer) net, the charity receives £125.
There is also an option to redirect this personal refund of 20% or 30% to a named UK charity. That re-direction could of course itself be gift-aided, if you still have enough tax "on the clock" at the Revenue…!