Gift aid was introduced to encourage charitable giving by giving tax relief for donations. There is no minimum or maximum payment.
The donation to the charity is treated as a payment on which the donor has already paid tax at the basic rate (20%). The charity can then recover the tax deducted. The grossed-up donation is an amount which, alter deducting income tax at 20%, is equal to the payment made to the charity.
The donor must make a declaration that the gift is being made under gift aid. This can be made by completing a form, or by phone or Internet.
The charity must be established in the UK or in another EU Member State, Norway or Iceland.
Donor’s Residence Status
The donor need not be a UK resident if the gift is made out of income or gains subject to UK tax.
Personal Allowance Adjustments
The donor’s basic and higher rate tax limits (the amounts of income above which higher rate tax and additional rate tax are payable) are both increased by the grossed-up amount of the donation.
The effect of increasing the basic and higher rate bands by the grossed-up donation is to give the donor an extra 20% or 25% tax relief depending on their marginal rate of tax. More income is taxed at 20%, but a corresponding smaller amount of income is taxed at either 40% or 45%.
Donors should make sure that they have a tax liability, including any tax deducted at source and dividend tax credits, of at least the amount of tax deducted from the donation. If they do not, they will have to pay the excess tax deducted from the donation to HMRC. For this reason, non-taxpayers should not use this facility.
Reciprocal Benefits for Donor
Any reciprocal benefit received by the donor from the charity must not exceed the following limits and must be considered on an annual basis where a donor makes a series of gifts.
- 25% of the donation for donations up to £100;
- £25 for donations between £101 and £1,000;
- 5% of the donation for larger gifts, subject to an overriding limit of £2,500.
Carry-Back From Previous Tax Year
Donations can be treated as made in the previous tax year provided the carry-back claim is made no later than the date the donor submits his or her tax return and, in any event, not later than the 31 January tax return submission deadline.
Individuals can also make gift aid donations to registered community amateur sports clubs on the same terms as to charities.
Charities Aid Foundation
Centralised charities such as the Charities Aid Foundation allow donors to make gill aid payments to their scheme, which processes payments. The scheme recovers the tax from HMRC and donors can make gifts amounting to their gross donation to many different charities using a special cheque book or card. The charities that are the final recipients of the gifts do not recover the tax from HMRC themselves.