Capital Gains Tax  

Make donations tax-efficient

  • To understand how gift aid works
  • To learn how gift aid affects one’s tax allowances
  • To learn how to use one's company to make a donation
Make donations tax-efficient

As I write this article, Christmas is only a week away, and generally it is at Christmas that our thoughts turn to those less fortunate than ourselves. Therefore, we are more likely to put something into a collection box as the Salvation Army band plays Christmas carols at the local shopping centre, which in itself is laudable, but from a tax perspective, extremely tax-inefficient for the charity and potentially for you.  

When considering giving to charity, there are two tax-efficient ways of making financial donations to charities: Gift Aid and Payroll Giving. I urge you to use either if you are planning to give money to charity this Christmas or at any other time.

UK taxpayers making online donations to recognised charities always have the option to pay via Gift Aid. This allows charities to claw back your tax from HM Revenue & Customs (HMRC) on one-off or regular donations, meaning your donation is increased by 25 per cent or more.

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All the charity needs is your initial and surname, address and a declaration that you are a UK taxpayer and have paid sufficient tax to cover the amount reclaimable by the charity, with an understanding that if this is not the case then you are responsible for paying any difference back to HMRC.  

Now, many charities believe a signature makes an individual more committed to their charity, but a signature is not a Gift Aid requirement. Indeed, the Gift Aid declaration can be verbal, so it can also be done over the phone or in person. If a charity receives an oral declaration, and it does not keep an audible (and auditable) recording of the donor’s oral declaration, it must send the donor a written record of the declaration. A declaration can cover a single donation or any number of donations. This means in monetary terms if you give £10 to a qualifying charity, and you are a basic-rate taxpayer (currently paying 20 per cent income tax), you will have paid £2.50 in tax on the gross donation (to take home £10, you will have earned £12.50 before income tax). Gift Aid means charities are able to reclaim this £2.50 tax that you have paid back from HMRC.  

In order to participate/qualify for Gift Aid you must be a UK taxpayer, but the donor need not be a UK resident provided that the gift is made out of income or capital gains subject to UK tax.  

You can use Gift Aid if the amount of income tax and/or capital gains tax you have paid for the tax year in which you make your donation is at least equal to the amount of basic rate tax the charity will reclaim on your gift. If more than one Gift Aid donation has been made in the tax year they must be added together to work out the tax the donor must be charged with.

If the donor is not charged with sufficient tax to cover the income tax deducted from their gift aid donations, they will owe the amount of the difference in tax to HMRC. For this reason, it is important non-taxpayers must not use the Gift Aid scheme.