Avoiding the Gift Aid tax trap

March 21st 2021

You recently saw a press article about tax and Gift Aid donations, it said that people who donate to charity and whose income has been hit by coronavirus can face unexpected tax bills. Are you at risk of this? Helen Johnstone provides the answer.

As you probably know, under the Gift Aid scheme charities and community amateur sports clubs can claim 25p extra for every £1 they receive in donations. They get this by reclaiming the 20% basic rate tax you deducted (probably without realising it) from your donations. Normally, when you collect tax from a person or organisation you have to pay it to HMRC, but in this situation the books are balanced because the donor is entitled to tax relief for Gift Aid donations.

However, if you don’t pay tax (income and capital gains tax) at least equal to the amount you deducted from your Gift Aid donations, then you’ll owe HMRC the difference.

Conversely, if you pay higher or additional rate tax (intermediate, higher or top rate tax for Scottish taxpayers), you can claim extra tax relief on Gift Aid payments.

Gift Aid procedures
Before the charity can reclaim the tax you withheld from your donation it needs you to declare that you pay UK tax. That is why charities ask you if you want to Gift Aid your donation. Your declaration can be used to cover future donations, and those made in the last four years, so you need to be aware of the consequences. For example, if your taxable income has reduced significantly you should check that you have paid enough tax to cover that which you deducted from your donations.

How much tax is enough?
To work out if you have enough to cover your giving, total up all your donations in the tax year. Divide the total by four. Compare this with tax paid. It’s possible you made a joint Gift Aid declaration with your spouse or civil partner. In that case, treat half of the donation as yours and half as theirs. They should also check their Gift Aid position if they think they are at risk.

When totalling gifts, remember some visitor attractions operate Gift Aid on admission fees. Don’t overlook these.

Changing plans
If the figures are too close for comfort, in some circumstances you can make an election to have a donation made one tax year treated as if it were made in the previous one, however these rules are tricky.

Alternatively, you can cancel your Gift Aid declaration at any time. If you think you haven’t enough tax to cover your donations, it’s up to you to notify the charity. There is no set way of doing so. HMRC says you can make a notification “in any convenient way”. Cancellation usually takes effect from the date you notify the charity, but you could specify a future date.

When you make a Gift Aid donation you withhold tax (whether you realise it or not) equal to 25% of what you pay. This is owed to HMRC but is balanced by tax relief that you’re entitled to for the donation. If your tax bill for a year is less than what you withheld, you will owe HMRC the difference. Withdraw your Gift Aid declaration to prevent this.