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Gift Aid is a scheme to enable tax-effective giving by individuals to charities in the United Kingdom. The Gift Aid scheme was originally introduced in Finance Act 1990 for donation from 1 October 1990, but was originally limited to cash gifts of £250 or more. The scheme was substantially revised from 6 April 2000, when the minimum donation limit was abolished. A separate scheme applies to charitable donations by companies that are subject to UK corporation tax.
The details of the scheme are complicated, and this article only gives an outline of its basic feature.
Gift Aid allows individuals who are subject to UK income tax, to complete a simple, short declaration that they are a UK taxpayer. Any cash donations that the taxpayer makes to the charity after making a declaration are treated being made after deduction of income tax at the basic rate (22% in 2006/7), and the charity can reclaim the basic rate income tax paid on the gift from HMRC. For a basic-rate taxpayer, this adds approximately 28 per cent to the value of any gift made under Gift Aid. Higher-rate taxpayers can claim income tax relief, above and beyond the amount claimed directly by the charities. The rate of the relief for higher-rate taxpayers in 2006/7 is usually 18%, the difference between the basic rate (22%) and the higher rate (40%) of income tax, although recipients of savings income (taxed at 20% and 40%) and dividend income (taxed at 10% and 32.5%) can achieve higher rates of tax relief (20% and 22.5%, respectively).
Originally, declarations had to be made in writing. Declarations can now be made verbally, but the charity must confirm the declaration in writing and keep a copy of the confirmation. If the taxpayer incorrectly makes a declaration, the charity is still able reclaim the tax that should have been paid on the gift, but the individual is required to pay the same amount to HMRC to make up the difference.
Gift Aid cannot be claimed on gifts that charities receive in return for goods or services, although there is a specific exclusion for "rights of admission".
A practical example
- Mr X spends £90.00 on charity Christmas cards from his favourite UK charity.
- Being a kind-hearted soul, he decides to round-up his contribution to £100, making a donation of £10.00.
If Mr X is a higher-rate taxpayer, paying 40% income tax on part of his income. He has made a Gift Aid declaration to the charity. As a result:
- the £10.00 gift is treated as being made after deduction of basic rate tax at 22%. The amount actually paid, £10.00, is the after-tax net value of the gift, but the gross value of the gift before tax is £12.82 (£10.00 × 100/78)
- the charity can claim the £2.82 of basic rate tax (£10.00 × 22/78) that the taxpayer is treated as having paid on the gift, effectively an extra 28% on top of the value of the £10.00 donation
- as a higher-rate taxpayer, Mr X can also claim back 12% of the gross value of the gift, £1.54 (£10.00 × 12/78), when he makes his tax return
- the £90 spent on cards is ineligible for Gift Aid, as Mr X has received goods in return for his money
The benefits to the charity
| £90 | for the goods | |
| £10 | donation | |
| £2.82 | refund from HMRC | |
| Total to charity = | £102.82 |
|---|
The cost to the donor
| £90 | for the goods | |
| £10 | donation | |
| less | £1.54 | refund from HMRC in due course |
| Total cost to Mr X = | £98.46 |
|---|
External links
These sources give the Revenue's view, which is important but should not necessarily be taken as correct on all points.
- The Giving Campaign - promoting all forms of tax-effective giving.
Taxation in the United Kingdom
References
Taxation of Charities, James Kessler QC, 5th edition 2005, Key Haven Publications
"Gift Aid"