12th April 2016 at 3:15pm
Encouraging charity donations is one example of how the UK tax system incentivises certain activities.
The tax system creates a win-win for charities and donors through tax relief on donations, known as Gift Aid. The £1bn claimed by charities in 2012-13 through Gift Aid illustrates how this re-directs tax revenues to the charity sector.
How Gift Aid works
At its simplest, Gift Aid means that for every £1 you give to a charity, an extra 25p can be claimed by the charity from HM Revenue and Customs, provided you’ve paid enough tax to cover that amount.
What may be less well known is the extra benefit which can be claimed by higher rate (40%) and additional rate (45%) taxpayers and involves taking an extra step in your tax return.
Tax relief worth £940m was reclaimed by individuals and businesses in 2012-13 this way.
In some instances, doing this could result in someone moving to a lower tax bracket. Here’s how.
Case study: Understand the benefits
Laura has income of £43,250 in tax year 2016-17. This takes her just into the bracket for higher-rate tax, by £250. Laura sponsors some of her friends for various charity events, and makes a monthly donation to her favourite charity.
In total, she has given £200, which becomes £250 once the charities have claimed Gift Aid. Through self-assessment, Laura completes her tax return online and can take the extra step of claiming additional tax relief.
This means £250 more of her income is taxed at 20% instead of 40% and she can claim a tax refund of £50 from HM Revenue and Customs (£250 at 20%). In this particular example Laura effectively becomes a basic-rate taxpayer.
Laura is not obliged to claim this, and many people forget or are unaware that it’s even possible to claim the additional tax relief. It works in a similar way to tax relief when a higher-rate taxpayer contributes to their personal pension.
If Laura’s salary was under £43,000 in tax year 2016-17, she would not be entitled to claim additional tax relief on her donations. The charities could, however, still claim the usual 20% Gift Aid at their end.
Gift Aid is not just cash donations
Donating goods to a charity shop can also benefit from Gift Aid. If you receive a letter from a charity you’ve donated goods to, setting out what they’ve sold on your behalf, you can keep that letter and use the figures in your tax return as evidence for the additional tax relief you’re entitled to claim if you’re a higher or additional rate taxpayer.
Get your tax refund quicker
Finally, there is a way to get your tax refund more quickly.
By filling in certain boxes in your tax return you can claim tax relief on donations made in the current tax year, even though your tax return deals with the previous tax year.
For example, you may be completing your 2015/16 tax return in August 2016. You can choose to claim additional tax relief on any charity donations you have made between 6 April 2016 and the date in August 2016 when you file online.
You can read more about Gift Aid and donating to charity on HM Revenue and Customs.
The information in this blog or any response to comments should not be taken as financial advice. Laws and tax rules may change in the future.
Standard Life is not responsible for the content of external websites. The information here is based on our understanding in April 2016.