Last week, I looked at some of the fundamental rules in connection with tax relief on charitable donations under Gift Aid. The catalyst for this review is the cap on tax relievable charitable giving (and other currently uncapped income tax relief) from April 6, 2013.
If you are to claim relief for a charitable gift under Gift Aid, you must keep records of your donations to charity to make sure that you claim the correct amount of tax relief and pay the right amount of tax.
For every tax year, you should keep the following records:
Details of Gift Aid donations showing the date, the amount and the charities involved
Legal documents showing the sale or transfer of assets to charity – including share transfer documents or certificates or land transfer documents
Any documentation from a charity asking you to sell land or shares on its behalf
So let’s have a look at some of the details in connection with donations made under Gift Aid.
Given that higher-rate and, if appropriate, additional-rate tax relief is available if the gift to charity is made through Gift Aid, knowing how Gift Aid works is essential.
The Gift Aid scheme is for gifts of money by individuals who pay UK tax. Gift Aid donations are regarded as having basic-rate tax deducted by the donor. Charities take your donation – which is money you have already paid tax on – and reclaim the basic rate tax from HM Revenue & Customs on its gross equivalent – the amount before basic-rate tax was deducted.
Basic-rate tax is 20 per cent so this means that if you give £10 using Gift Aid, it is worth £12.50 to the charity. For donations between April 6, 2008 and April 5, 2011 the charity also got a separate Government supplement of 3p on every pound you gave.
In order to make a Gift Aid donation, you will need to make a Gift Aid declaration. The charity will normally ask you to complete a simple form – one form can cover every gift made to the same charity for whatever period you choose, and can cover gifts you have already made and/or gifts you may make in the future.
A Gift Aid declaration must include:
- your full name
- your home address
- the name of the charity
- details of your donation, and it should say that it’s a Gift Aid donation
You can use Gift Aid for gifts you make jointly if you tell the charity how much each of you is giving and if you each make a Gift Aid declaration.
You can use Gift Aid if the amount of income tax and/or capital gains tax you’ve paid for the tax year in which you make your donation is at least equal to the amount of basic rate tax the charity and any other charities you donate to will reclaim on your gift.
If you make a number of Gift Aid donations, you will need to consider the tax you have paid on each donation on an accumulative basis. If you do not pay enough tax you will need to pay any shortfall in tax to HMRC.
You do not necessarily have to be working to be paying tax. Apart from tax on income from a job or self-employment, the tax you have paid could include:
- Tax deducted at source from savings interest
- Tax on state pension and/or other income (including tax credits on UK dividends)
- Capital gains tax on gains
Other taxes, such as VAT and council tax, do not qualify, nor does any non-UK tax.
Given that the current debate around the cap on tax relief is focused on the potential impact of this provision on higher and additional-rate taxpayers it is important to understand how higher and additional rate tax is secured.
The difference between the higher rate (40 per cent) and additional rate (50 per cent) and the basic rate of tax (20 per cent (that is, 20 per cent or 30 per cent) can be claimed on the total “gross” value of your donation to the charity.
For example, if you donate £100, the total value of your donation to the charity is £125 – so you can claim back:
- £25 – if you pay tax at 40 per cent (£125 x 20%)
- £37.50 – if you pay tax at 50 per cent (£125 x 20%) + (£125 x 10%)
You can make this claim via the self-assessment tax return.