‘Tick the Gift Aid’ box to boost your donation to charity and save some tax.
In recent years, requests for national and international donations have increased significantly. You’re likely familiar with the ‘Tick the Gift Aid’ box or being asked to sign a declaration when donating to charity. Generally, taking this step benefits both you and the charity. This straightforward action can make a £100 donation cost you just £40 (or £32.50 in Scotland).
When donating with Gift Aid, the charity can reclaim £2 of tax from the government for every £8 you donate. The only constraint is that you must have paid at least as much income tax or capital gains tax in that tax year as the charity will claim. For instance, if you gift £800 and the charity reclaims £200, you will need to have paid £200 in tax.
If you pay tax at more than basic rate, gifting allows you to reclaim some tax. For example, let’s revisit your £800 gift. If you have at least £1,000 of income taxed at 40%, then you can personally reclaim £200 (£1,000 x (40%–20%)). This increases to £250 for 45% taxpayers. However, the process is not automatic and you must remember to make a reclaim, usually through your tax return.
The tax relief mechanics of Gift Aid donations can provide other tax benefits because the amount of your gift, plus the tax reclaimed by the charity, counts as a deduction in calculating your ‘adjusted net income’. This income figure is used in three important income thresholds:
- High income child benefit charge between £60,000 and £80,000 (£50,000–£60,000 in 2023/24);
- Tapering of the personal allowance between £100,000 and £125,140; and
- Entitlement to tax-free childcare, which is completely lost at £100,000+.
A good – if somewhat extreme – example would be Joe, who has an income of £102,000 and makes a donation of £1,600 (equivalent to £2,000 for the charity after its tax reclaim). The gift reduces Joe’s adjusted net income to £100,000, so he would:
- Recover £1,000 of the personal allowance, saving £400 (£450 in Scotland) in tax on top of £400 (£500) reclaimable as a higher (advanced) rate taxpayer; and
- Regain entitlement to tax-free childcare, assuming his partner/spouse did not break the income threshold.
To discuss your financial planning, contact our Sheffield based Financial Advisers on 0114 266 4432 or info@smh.group
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