Latest statistics reveal that the average Gift Aid donor gives £360, though Northern Ireland tops the list, with an average gift of £750. However, close attention to the rules is important to avoid any unexpected complications including an unwanted tax bill.
This is particularly prevalent following a High Court case in 2020, involving a charitable gift of £800,000. The taxpayer, Mr Webster, inadvertently entered the gift as £400,000 on his tax return, although he had in fact increased the donation to £800,000. The aim was to use special Gift Aid carry back rules (below) as he hadn’t enough tax in charge to cover the donation in the current tax year. But because of a variety of errors, the verdict went against him. And that resulted in a £215,000 tax bill.
1. Not enough tax in the tax year in which a donation is made
Gift Aid allows a charity to claim back the basic rate tax (currently 20%) that you have paid on your donation, so your chosen charity ends up with a bigger gift.
Always check you will pay enough tax in the tax year you make the donation. If you will not pay enough tax, you can opt out of the gift aid declaration. You must pay enough tax – income tax or capital gains tax – to cover the amount reclaimed by the charity. As a rule of thumb, donations should qualify if they’re not more than four times what you have paid in tax during the tax year.
As happened in Mr Webster’s case, it’s the taxpayer who would be asked to make up any shortfall, not the charity. If in doubt, contact the charity to cancel the Gift Aid declaration for future donations.
2. Scottish tax rates are different
Different rates of tax apply in Scotland, but the basic Gift Aid principles are the same. Scottish taxpayers paying at 19% should check that enough tax has been paid to cover their Gift Aid claim.
3. Unclaimed additional tax relief
If you pay tax at more than basic rate, you can reclaim the difference between this and basic rate on the donation. However, research suggests many people don’t claim the additional tax relief to which they’re entitled.
Higher rates of tax relief would normally be claimed on the self assessment tax return, or by asking HMRC to amend a PAYE tax code.
Ensure you include details of any gift aid donations made in your tax return paperwork.
4. Lost paperwork
Don’t throw away the paperwork. It’s important to keep records of all Gift Aid donations in order to substantiate claims for higher rates of relief.
5. Mistakes with the small print
Higher rate tax relief is usually given in the tax year in which you make the donation. So a Gift Aid payment made by 5 April 2022 would get tax relief against income of 2021/22. This in itself can be a useful tax planning tool.
But it may be possible to elect to have a Gift Aid donation treated as if made in the previous tax year. This can be a plus if you want to speed up tax relief or paid higher rates of tax in the previous year. To carry back a donation made between 6 April 2022 and 31 January 2023 against 2021/22 income, strict timing rules apply. The election would be made on the 2021/22 tax return, for which the final filing deadline is 31 January 2023.
Carry back elections are best made on the self assessment tax return. Correct procedure is essential, as Mr Webster found to his cost. Once the tax return is filed, the window to make a carry back election closes. The election can’t be made on an amended return: something HMRC has recently been writing to taxpayers about. Neither can an election, once made, be amended. A further point is that carry back elections can’t be used for part of a gift: they must be used for the whole sum.
For a discussion of charitable giving and the implications for tax, please contact us.
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