Pre Year End Tax Planning – Gift Aid
As mentioned in our previous article, pension contributions are a tax efficient method of reducing your exposure to higher rate tax by way of extending the basic rate band, but they are not the only option. Gift Aid is a tax efficient way for taxpayers to make donations to charities.
A charity which is registered and approved as a qualifying charity can claim Gift Aid relief on donations, as long a Gift Aid declaration has been completed by the donor. If the donation is made from income which has already been subject to the basic rate of tax, the donation will be grossed up by the UK basic rate of tax of 20%. The charity can claim an additional 25p for every £1 they receive.
Higher rate taxpayers in Scotland will benefit from additional relief of 21% on any Gift Aid donations made. This is due to the basic rate band being increased by the value of the gross gift aid payment and the Scottish higher rate of tax being 41%. Top rate taxpayers in Scotland will receive 26% tax relief. Relief should be claimed in your tax return.
If your income for the year happens to fall between £100,000 and £125,000, you are exposed to a marginal tax rate of 61.5% as a result of paying higher rate tax on every £1 over £100,000, together with having to pay an additional 21% on every £1 of your personal allowance which is lost. Gift Aid donations can combat the marginal rate as all donations made will extend your basic rate band and will also restore your personal allowance by £1 for every £2 donated.
To be entitled to Gift Aid relief on your donations you must pay enough tax to cover the 20% tax the charity will reclaim from HMRC. If you have paid less tax than the reclaimable value, you will be liable to pay the difference to HMRC.
You can also carry back gift aid donations to claim the relief sooner. For example, when you are completing your 2021/22 tax return, you can claim gift aid donations made during the period 06/04/21 to 05/04/22 and include any donations made in the 2022/23 tax year up to the point that you submit your tax return, by the 31 January 2023 deadline.