Gift aid in a nutshell
Gift aid allows individuals to receive income tax relief on donations of cash to charity. The individual is deemed to make the donation net of basic rate tax, which the charity claims back from HMRC. Those paying income tax at rates above the basic rate can claim the extra tax relief from HMRC, either via self assessment or an adjustment to their PAYE code. Anti-avoidance rules ensure the individual does not benefit or gain an advantage from the donation.
What conditions must be met by the donor?
To qualify for gift aid, the donor must be an individual. There is no residence requirement for gift aid; it does not matter whether or not the individual is UK resident, but they must pay UK tax in order to obtain tax relief.
For the donation to qualify for gift aid, it must meet a number of conditions, including that it must be a payment of a sum of money, there are no conditions as to repayment and the payment is not related to the acquisition of an asset (either by the individual or the charity). The individual must also make a gift aid declaration to the charity, which is normally a tick box on the donation form, stating that they pay tax in the UK.
What charities qualify for gift aid?
In order for a charity to qualify for gift aid, it must meet the definition of charity for the purposes of the Taxes Acts. This mean it must be established for charitable purposes only, must be under the jurisdiction of UK courts (or those in a relevant territory), have complied with any requirements to register with the Charity Commission (or equivalent) and the management of the charity must be fit and proper persons.
There is no requirement for the charity to be based in the UK; it can be based in any country in the European Economic Area.
How does the donor obtain tax relief on the donation?
Cash donations made via gift aid are treated as having been made net of basic rate tax, often referred to as having received ‘relief at source’. For example, a cash donation to charity of £80 is a net donation of £80. The gross donation is £100 (£80 x 100/80). The tax relief at source is £20 (£100 – £80).
If the taxpayer is a basic rate taxpayer, no further adjustment to the income tax calculation needs to be made. However, if the taxpayer is a higher rate taxpayer or an additional rate taxpayer, extra tax relief is given by extending the basic rate band (and higher rate band, if appropriate) by the gross donation.
For Scottish taxpayers paying tax at a rate above 20%, the relevant tax bands (potentially the Scottish basic rate, Scottish intermediate rate and Scottish higher rate bands, plus the appropriate UK bands where the taxpayer has savings or dividend income) need to be extended by the value of the gross donation.
The taxpayer can make an election on their tax return for a gift aid donation in the current year to be treated as having been made in the previous tax year. This can increase the tax relief available where the individual has a higher marginal rate of tax in the previous year.
What if the donor has not paid sufficient tax to cover the relief at source?
The tax treatment discussed above assumes the taxpayer has paid sufficient UK tax to cover the relief at source. Where the total amount of tax (income tax plus capital gains tax) for the year does not cover the tax relief at source, the taxpayer must pay over the difference to HMRC via their tax return.
Are there any anti-avoidance rules?
The donation cannot qualify for gift aid if the donor receives a benefit from the charity (or any person associated with the charity) that exceeds the statutory limits:
- gift of £100 or less — benefit cannot exceed 25% of the amount of the gift
- gift of more than £100 — benefit cannot exceed £25 plus 5% of the additional amount donated over £100
The total benefits a donor receives from any one charity in a tax year cannot exceed £2,500.
Certain benefits are ignored for these purposes, including where the donation gives the donor a right of admission.
In addition to the associated benefits rules, there is a further anti-avoidance provisions which applies where the main purpose or one of the main purposes of making the donation is for the donor (or a person connected to them) to receive an ‘advantage’. These donations are ‘tainted’ under the tainted charity donations rules and tax relief is denied.
What is the tax position for the charity?
The charity reclaims the 20% tax relief at source from HMRC via the HMRC charities online service. Charities that receive small donations of £30 or less which are collected in the UK can apply for a gift aid style repayment without the need to obtain gift aid declarations for those donations. This is known as the ‘gift aid small donations scheme’. The amount of small donations on which the repayment can be claimed is capped at £8,000 per year, per charity.