Donations made to a charity or community amateur sports club are eligible for tax relief under the Gift Aid provisions if certain conditions are fulfilled. The person making the donation to charity must be UK resident or a Crown servant working overseas. Gift Aid may also be used by a non-UK resident person who has income or capital gains that are subject to UK taxation.
To qualify under the Gift Aid provisions, the donation to charity should be made in money and must not also be made under the payroll giving scheme, which is an alternative method of making donations with tax relief. The donation must not be repayable to the donor and should not be deductible in computing the donor’s taxable income. The donor must make a Gift Aid declaration with regard to the donation.
The donor should not receive any benefit from making the donation, but where any benefit is received this should not exceed the following limits:
25% of the gift if the gift is not more than £100; £25 if the gift exceeds £100 but is not more than £1,000; or 5% of the gift if it is more than £1,000.
These limits are subject to an overall limit of £500 on the value of benefits received in one year for Gift Aid donations to one charity.
A charitable donation that qualifies under the Gift Aid provisions is treated as if it was made net of the 20% basic rate of income tax and the charity or community amateur sports club can reclaim the income tax deemed to have been deducted at source by the donor. So in the case of a donation of £80 to a charity, this would be treated as a gross donation of £100 from which £20 income tax has been deducted, and the charity or community amateur sports club can reclaim £20 income tax from HM Revenue and Customs (HMRC).
For charitable donations made using Gift Aid on or before 5 April 2011, an additional 2% income tax can be reclaimed by the charity or community amateur sports club. This is a transitional relief introduced to compensate for the reduction of the basic rate of income tax from 22% to 20% in 2008/09, but is only available for tax years up to and including 2010/11.
It is important for a donor to note that for the Gift Aid rules to apply as described above the donor must be paying income tax and capital gains tax that are at least equal to the amount of tax deemed to have been deducted from the donation. Where this is not the case, the donor’s personal tax allowance is restricted to ensure that the required amount of tax is paid. Where the restriction of the personal allowance does not result in sufficient tax being paid to cover the deemed tax deducted from the donation, the donor will be charged to basic rate income tax on a proportion of the donation to ensure that enough tax is collected.
If the donor is a higher rate taxpayer, then tax relief is available for the donor. The donor’s basic rate and higher rate threshold (tax band) are increased by the amount of the gift, thereby effectively giving income tax relief at the 40% higher rate or at the additional rate.
An election can be made to carry back the Gift Aid donation so that it is treated for tax purposes as having been made in the previous tax year. This election must be made on or before the date that the tax return for the previous year is submitted to HMRC, and before the 31 January following the end of the tax year in which the donation is made.
A company can also make a donation to charity under the Gift Aid provisions. In this case, the charitable donations are made gross by the company, and are therefore not grossed up as is the case with Gift Aid donations from individuals. The company is entitled to deduct the Gift Aid donations paid during an accounting period from its taxable profits for that period.
HM Revenue and Customs www.hmrc.gov.uk
“Taxation: Finance Act 2010”, by Alan Melville, sixteenth edition, 2011