Gift Aid issues

This video is all about gift aid and the effect it has on your tax return.

The basic rules of Gift Aid

The basic rules are money given to charity can have gift aid attached to it.

In effect, if you are a UK taxpayer, you can give money to charity. It must be a UK or a European economic area charity and it must be registered. It’s not just a person down the end of the road that says it’s a charity. It must be a registered charity. And what can happen is that you can give the charity, let’s say a £100 and check the gift aid box. They apply to HMRC and your £100 actually becomes £125. So for every £1 you give to the charity, HMRC gives a further £0.25.

Gift Aid Issues - Performance Accountancy

Great for the charity, and obviously you feel good for giving money to charity. Now it doesn’t have to be a big worldwide charity, but UK based, like let’s say the Red Cross or Great Ormond Street. It could be some of the little charities down the road, but they all have to be registered charities. And with that, they can then claim from the government 25 pence in the pound. Charities normally do it once a year. There are gift aid forms that they have to complete. They have to give a list of people’s names and how much money has been donated and the gift aid being claimed. Whether there are any checks between who’s paid what, and people’s tax returns? I don’t know, I have never asked. So, that is the basis of gift aid. You pay in £1 and HMRC pays in £0.25.

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Effective Contributions – the impact of Gift Aid

So your effective contribution is £1.25. Remember that bit. Now there can be three different effects on your tax return, and it does depend on what your UK tax status is. If you don’t actually earn enough money to pay income tax (your income is below the personal allowance) then never tick the gift aid box. It does ask if you are a UK taxpayer and people just assume that you’re UK residents.

Yes, of course you’re a UK taxpayer, but if you don’t earn enough money, then you should not be ticking the gift aid box. The effect is you haven’t actually paid over to HMRC any tax. It is your contribution to the HMRC coffers that allows them to pay over to the charity. So what will end up happening is you put in £100 into the gift aid box.

Grossing up of contributions

It gross gets grossed up by the HMRC systems to 125 pounds because that’s the total contribution that the charity will have got, but you haven’t paid 25 pounds to HMRC in order for them to give the 25 pounds to the charity, HMRC will still pay it over. But the effect is, unfortunately you have to pay over this extra 25 pounds. So not only if you’re given the a hundred pounds, you effect a tick in the gift aid box is you then have to pay the extra 25 pounds. Okay?

So if you are a basic rate, taxpayer, the gift is still a hundred pounds. The effective gift to the charity is 125 pounds. So your contribution is 125 pounds. What happens for you is that the basic rate tax threshold gets increased by 125 pounds, but in effect, it doesn’t give you any benefit because so what if the tax threshold between 20% and 40%, or if you’re in Scotland between 20% and 21%, the increase doesn’t make any difference to you because you haven’t got enough income to go over that threshold. So it needs to be in the tax return because it’s part of the form, but you don’t get any benefit from it. Okay.

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Higher rate tax payers

So the benefit kicks in. If you are a higher rate taxpayer or an additional rate, taxpayer, I’m only looking at higher rate taxpayer now. The gift of £100 goes into the tax return as £100, and it gets grossed up to £125 as before. As per the non taxpayer and the 20% taxpayer, the basic rate tax threshold then gets increased by £125. In effect, you’re saving tax at 40% or in Scotland at 21%, as it gets added to the threshold. What that means is £125 worth of your income would have been taxed at 40%. You would have a tax bill of £50, but as the threshold has been increased by £125 , that £125 worth of income is now only taxed at 20%. Therefore you gain £25.

You’re not paying tax of £25 extra for Scotland. It’s not much of a much of a difference. For Scotland, the £125 worth of income would have been taxed on the individual at 21%. You would have paid over 26.5%, but the £125 increase on the threshold means it’s only taxed at 20%. In your tax return, you’re only putting £100 in the gift aid, but because it equals £125 being given to the charity (£100 from you and £25 from the government) you will see on your tax return. It then says you have made a contribution of £125 in summary. If you are not going to be paying any UK income tax, do not tick the gift aid box for any new donations.

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It could be worth doing a tax return

If you currently have direct debits going out to charities, you can call the charity and ask them to cancel the gift aid for that tax year. Possibly if you’re lucky, they might be able to cancel it for the year before. You can always phone them up again. In a few years later, when income is picked up to add the gift aid box back on. Now, one thing to point out, a lot of PayU people may be paying towards the charity.

You’ve gifted money to charity, but you’ve done nothing about it. If you are a higher rate taxpayer, and you don’t do a tax return, get yourself onto the tax return system for self-assessment. Especially if it’s a fair whack, like a tithe to a church, do a tax return. It will increase your threshold between 20 and 40%. Then potentially you’re paying less tax and you may even get a rebate.

I wouldn’t suggest that if you’re not paying a fair whack into a charity. If you’re paying things like £10 or £20, et cetera, it’s not worth your time to do a tax turn or employ an accountant to do it. But people do make considerable payments to churches. It’s a good thing to look at.

If you have any questions, feel free to drop me an email [email protected]


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