The number of national and international calls on our goodwill to donate to causes has grown in the last few years. You are probably familiar with the ‘Tick the Gift Aid’ box, or a request to sign a declaration, when you donate to charity. As a rule, it makes sense for you and the charity to do so. This simple step could mean a £100 gift costs you only £40 (or £32.50 in Scotland).
When donating with Gift Aid, the charity can reclaim £2 of tax from the government for every £8 you donate. The only constraint is that you must have paid at least as much income tax or capital gains tax in that tax year as the charity will claim. For instance, if you gift £800 and the charity reclaims £200, you will need to have paid £200 in tax.
If you pay tax at more than basic rate, gifting allows you to reclaim some tax. For example, let’s revisit your £800 gift. If you have at least £1,000 of income taxed at 40%, then you can personally reclaim £200 (£1,000 x (40%–20%)). This increases to £250 for 45% taxpayers. However, the process is not automatic and you must remember to make a reclaim, usually through your tax return.
The tax relief mechanics of Gift Aid donations can provide other tax benefits because the amount of your gift, plus the tax reclaimed by the charity, counts as a deduction in calculating your ‘adjusted net income’. This income figure is used in three important income thresholds:
- High income child benefit charge between £60,000 and £80,000 (£50,000–£60,000 in 2023/24);
- Tapering of the personal allowance between £100,000 and £125,140; and
- Entitlement to tax-free childcare, which is completely lost at £100,000+.
A good – if somewhat extreme – example would be Joe, who has an income of £102,000 and makes a donation of £1,600 (equivalent to £2,000 for the charity after its tax reclaim). The gift reduces Joe’s adjusted net income to £100,000, so he would:
- Recover £1,000 of the personal allowance, saving £400 (£450 in Scotland) in tax on top of £400 (£500) reclaimable as a higher (advanced) rate taxpayer; and
- Regain entitlement to tax-free childcare, assuming his partner/spouse did not break the income threshold.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.