On the Fourth Day of Christmas my tax adviser gave to me …. A tax relief for donating to Charit-ee!
The combination of the Christmas spirit and the ongoing humanitarian crises, such as the spread of the Ebola virus and the civil war in Syria, will encourage many of us to donate our hard earned cash to charity, but what are the tax implications of doing so?
When making a donation you will notice an option to ‘Gift Aid’ the donation – but what does this mean?
By ticking this box the individual is declaring that they will pay sufficient Income Tax for the charity to reclaim an additional 25% of the donation made from HM Revenue & Customs (HMRC). So for example if an individual donates £80 to charity and ticks the Gift Aid box, the donation is worth £100 to the charity. The reason for this is that a taxpayer makes the donation out of their net (after tax) income, and this allows the charity to reclaim the tax suffered by the individual. As this only provides relief for Basic Rate (20%) tax, let’s look at three examples to see what tax relief is available for different taxpayers:
1) Stephen earns an annual salary of £60,000, with part of this income being taxable at the higher rate of 40%. Stephen decides to donate £800 to charity. He ticks the Gift Aid box and the charity can reclaim an additional £200. As he is a Higher Rate taxpayer Stephen can also claim additional relief via his annual Tax Return (or through his tax code if he is not in Self Assessment). The donation reduces the amount of income taxable at the higher rate of 40%, and in this case it will reduce Stephen’s tax liability by £200. If Stephen was an Additional Rate taxpayer (taxable income over £150,000) the donation would reduce his tax liability by £250.
2) John earns an annual salary of £20,000 and is therefore a Basic Rate taxpayer. He donates £400 to charity. He ticks the Gift Aid box and the charity can reclaim an additional £100 from HMRC. As John is a Basic Rate taxpayer no additional tax relief is available to John personally.
3) Mrs Smith receives an annual state pension of £6,000 and bank interest of £2,500 (received gross). As all of her income is covered by the tax free personal allowance she does not pay any Income Tax. As Mrs Smith has significant savings she likes to donate some money to charity each year, and this year she decides to donate £500 to the RSPCA. Mrs Smith is unsure as to whether she should tick the Gift Aid box. She understands that by ticking this box the charity will receive additional money and decides to go ahead. So what are the implications of this? By ticking the box the charity will receive an additional £125, reclaimed from HMRC. As Mrs Smith has not paid any Income Tax during the year she has made a false declaration, and this amount should be repaid to HMRC (usually via an annual Tax Return).
There are also other situations where making a payment to charity through Gift Aid will be of financial benefit to taxpayers, for example when calculating an individual’s assessable income for tax credits purposes. In this situation the payment to charity reduces the claimant’s assessable income (and could therefore increase the level of tax credits received). If a taxpayer receives child benefit payments and their income is over £50,000 it may reduce any amount which is repayable to HMRC under the ‘High Income Child Benefit Tax Charge’, but this will depend on individual circumstances.
Companies can also get tax relief for making charitable donations, although they are not eligible to make donations under the Gift Aid regime.