Changing personal circumstances may mean that individuals who were previously taxpayers find that they are now non-taxpayers. If they are in the habit of making charitable donations under gift aid, they need to tread carefully to avoid an unwanted bill from HMRC.
Donations made by individuals to charities or to community amateur sports clubs qualify for tax relief. Where the donation is made under gift aid, the amount donated by the individual is treated as made net of basic rate tax; the charity claims the associated tax back from HMRC. This means that every £1 donated by an individual under gift aid is worth £1.25 to the charity – the charity receives £1 from the individual and claims 25p from HMRC.
If the individual is a higher or additional rate taxpayer, they can claim additional tax relief (equal to the difference between their marginal rate of tax and the basic rate) through their personal tax return. For example, for every £1 donated by a higher rate taxpayer (equivalent to a gross donation of £1.25), a higher rate taxpayer can claim an additional 25p of relief through their tax return, while an additional rate taxpayer can claim further relief of 31.25p for every £1 donated.
When making a gift aid declaration, the individual must confirm that they are a UK taxpayer.
Your donations will qualify for gift aid as long as the donation is not more than four times the tax that you have paid in the tax year in question. Both income tax and capital gains tax count. The amount reclaimed by the charity is funded from the tax that you have paid. If you have not paid sufficient tax to cover the tax reclaimed by the charity under gift aid, HMRC may seek to recover the amount due from you. This will mean that each £1 donation wrongly made under gift aid will cost you £1.25.
If you have gift aid declarations in force covering ongoing donations, you should review these if your income falls to ensure that you are paying sufficient tax to cover that reclaimed on your donations. If you cease to be a UK taxpayer, you should cancel all gift aid declarations and remember not to add gift aid to any future donations.
Partner note: ITA 2007, ss. 413–430.