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Gift aid donations by individuals: the facts

Author Image The Technical Team
6 minutes read
Last updated on 1st Mar 2022

Gift aid is a tax-efficient way of gifting to charities

  • Allows the charity to reclaim the tax on donations made by individuals.
  • Tax-efficient way of gifting for individuals who pay tax at the higher or additional rate of tax.

What is gift aid?

The gift aid scheme is for gifts of money to charities by individuals who pay UK tax. Charities can reclaim tax on any donations made by individuals, whether large or small, regular or one-off – provided the conditions for the tax relief are satisfied. Gift aid donations are regarded as having (20%) basic rate tax deducted by the donor. This means charities can then reclaim the basic rate tax from HM Revenue & Customs (HMRC). A gift of £10 under gift aid is therefore worth £12.50 to the charity. The tax legislation is contained in Part 8, Chapter 2 Income Tax Act (ITA) 2007.

Definition of charity

The definition of charitable purposes for tax purposes is the one set down by the Charities Act 2006. For a charity to be able to take advantage of the gift aid scheme, it must register with HMRC and it must be established in an EU Member State or a country listed as a relevant territory in regulations (currently, Norway and Iceland).

Qualifying individuals

All individuals can make gift aid donations. The same rules apply for resident and non-resident individuals. Anyone who makes a gift aid donation must be charged income tax and / or capital gains tax for the year of donation, at least equal to the tax treated as deducted from all their gift aid donations.

Qualifying donation

To be entitled to relief, an individual must make a qualifying donation and give the charity a gift aid declaration.

A qualifying donation is a payment:

  • of a sum of money
  • not subject to any condition as to repayment
  • which does not fall under the payroll deduction scheme (payroll giving)
  • which is not deductible in calculating the individual's income
  • which is not in any way connected with the charity acquiring property from either the individual or a connected person (gifts are ignored).

In addition, the individual (or anyone connected to the individual) must not receive a benefit as a consequence of the gift in excess of the following limits:

Amount of gift

Maximum benefit

£0 to £100

25% of gift

More than £100

 £25 and 5% of the excess up to the overall restriction of £2,500

Also, the total value of benefits in the same tax year must not exceed £2,500.

If, in consequence of a donation, a charity allows a donor the benefit of a right of admission to view charity property then, providing certain conditions are met, the value of that benefit may be disregarded and the donation may qualify for gift aid.

Outright payments to a charity in return for services, rights or goods are not gifts to charity and so are not eligible for gift aid tax relief. For example, the following payments cannot come within the gift aid scheme:

  • school fees for a specific person
  • purchase of books, jumble sale items, food etc.
  • admission to events (jumble sales, concerts etc.)
  • purchase of raffle or lottery tickets.

Declaration

Before a charity can reclaim tax on a donation received from an individual, it must have received a gift aid declaration from the donor. Without this declaration, a donation from an individual will not qualify as a gift aid donation.

HMRC doesn’t produce an official form for gift aid declarations, so a charity can design its own. In saying that, the HMRC website contains a model gift aid declaration and it’s recommended that charities use the model adapted, as appropriate, to reflect the period of the intended gift aid donation(s).

Donations treated as being net of basic rate

Donors must be charged an amount of income tax and / or capital gains tax, whether at the basic rate or some other rate, for the tax year in which gift aid donations are made, at least equal to the income tax treated as deducted from the total of all their gift aid donations made in the same tax year. Donors who haven’t been charged sufficient tax to cover the income tax deducted from their gift aid donations are responsible to pay any difference.

Higher and additional rate tax relief

Individuals who pay higher or additional rate tax can claim the difference between the 40% and / or 45% and the basic rate of tax 20% on the total 'gross' value of the donation.

Example

Consider a donation of £1,000. The total value of that donation to the charity is £1,250. The individual can therefore claim back:

  • £250 – if the individual pays tax at 40% (£1,250 × 20%)
  • £312.50 – if the individual pays tax at 45% (£1,250 × 25%)

For calculation purposes, relief is given by increasing the basic rate limit and the higher rate limit by the grossed up amount of the gift.

Higher rate relief can be claimed through the self-assessment tax return or by asking HMRC to amend your tax code.

Note that for the purposes of top-slicing relief on chargeable event gains, the basic rate band is not extended by any gift aid payments made. 

Election to carry back relief

The donor can elect to treat the gift as if made in the previous tax year, providing sufficient tax was paid in that year to cover both any gift aid gifts made in the year plus the gifts being backdated.

The election must be made before or at the same time as delivery of the previous year tax return and no later than the filing deadline for the previous year's return (31 October for a paper tax return, or 31 January for online – i.e. in the tax year in which the gift is made). If the individual doesn’t complete a tax return then form P810 Tax Review can be requested.

Example

Mr White makes a gift aid donation of £1,000 on 1 June 2022 (2022-23). He wishes to consider the possibility of carrying back the relief to 2021-22.

If he had not already completed his tax return for 2021-22, he can make his carry back election and claim on that return, and file it online before 31 January 2023.

If he had already submitted his tax return for 2021-22, carry back would not be possible.

Scottish & Welsh Rates of Income Tax

With regard to Scottish taxpayers, Gift Aid will continue to be paid to charities at the basic rate. Scottish taxpayers who pay tax at a higher rate than 20% will then be able to claim the correct amount of additional relief on top of this. With regard to donors liable at the Welsh income tax rates, it has also been decided that gift aid for charities will continue at the UK basic rate. In due course, Welsh taxpayers will be able to claim relief equal to the difference between the UK basic and the highest Welsh rate of tax that applies to them.

https://www.gov.uk/government/publications/changes-to-tax-reliefs-following-the-scottish-governments-budget/changes-to-tax-reliefs-following-the-scottish-governments-budget

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