Gifting to charity (Part 1)

Introduction                   

The Government has, for many years, encouraged charitable giving by making a variety of tax reliefs available to donors who make donations to registered charities. These reliefs benefit charities indirectly since the relief is likely to have the effect of increasing the total amount received by the charity that can be applied for charitable purposes. For donors who are individuals there are reliefs in respect of income tax, capital gains tax and inheritance tax. Some of these - such as the ability for a taxpayer to nominate a charity to receive all or part of a tax repayment that is due to them - are advertised on the tax return, making it easier for taxpayers to donate.

 

Gift aid and income tax

Gift Aid is a scheme which allows charities and Community Amateur Sports Clubs (CASCs) to claim from HMRC the amount of basic rate income tax their donors, who can normally only be individuals, are treated as having paid on their cash (money) qualifying donations.  Donations can be a one-off or a regular series of payments.

Under the scheme, the donor gives a cash sum and the charity (in what follows ‘charity’ includes a CASC) is treated for tax purposes as if it had received a sum grossed up at 20% (the basic rate of income tax for 2020/21) from which tax had been deducted at 20%.

For example, a gift of £800 from a donor to a charity is treated for tax purposes as if the charity had received a sum grossed up at 20% from which tax was deducted at 20%.  This means that on a gift of £800 from a donor a charity is treated as receiving £1,000 from which £200 has been deducted. The charity receives £800 and claims £200 from HMRC.

The position for a donor who is a higher/additional rate taxpayer is that they can claim the difference between the higher/additional rate of tax they pay, as appropriate, and the basic rate tax they are treated as having paid on the grossed-up gift of £1,000 which means relief of up to £200 or £250 as appropriate. A Scottish taxpayer can claim the difference between the intermediate/higher/top rate of tax they pay and the basic rate tax they are treated as having paid.

 

Example - John

John, who is an English taxpayer, has £42,500 of taxable income in 2020/21 and so is a higher rate taxpayer. He wishes to make a Gift Aid payment of £2,500.

Tax relief on a Gift Aid payment works by increasing the basic rate limit, for the tax year in which the payment is made, by the grossed-up amount of the gift. If the payment is carried back this will apply to the previous tax year.

The position in the case of John would be as follows:

• The gift is treated as made after the deemed deduction of basic rate (20%) income tax. 

• The gift of £2,500 is grossed up by the basic rate tax treated as paid by John on his payment ie. it is divided by 0.8.  The grossed-up gift would therefore be £3,125.

• The basic rate tax limit (£37,500 for 2020/21), which marks the point after which higher rate tax is payable), would be increased by £3,125 to £40,625.  The higher rate tax limit (£150,000) can be similarly increased in appropriate circumstances.

• The effect of the increase in the basic rate limit for John is that £3,125 of income, which would otherwise be taxed at 40%, is taxed at 20%. This means that tax relief is available on £3,125 at 20% = £625.  The rate of tax relief on the £2,500 Gift Aid payment is therefore 25%.

• After extending the basic rate tax band/higher rate tax band a tax recalculation is carried out which means that overpaid income tax and/or capital gains tax can be recovered.  If the amount treated as deducted at basic rate and recovered by the charity exceeds the donor’s income tax and/or capital gains tax liability for the year in question, the donor has to make good the excess to HMRC.  It should be noted that the basic rate band is not extended when computing top-slicing relief on chargeable event gains under life assurance policies.

• The benefit of Gift Aid for the charity is that the donor’s net gift is increased by 25%.

 

and diagrammatically…

John makes a £2,500 Gift Aid payment
John has £42,500 taxable income.  

BEFORE	AFTER
£42,500 taxable income   Tax = £9,500	£42,500 taxable income   Tax = £8,875   Gift Aid to charity = £625 (20% of £3,125)   Reduction in tax to client = £625 (20% of £3,125)   Total tax payable = £9,500 less £625 = £8,875   Saving - £625

                                   

How Gift Aid works                          

As mentioned earlier, relief under the Gift Aid scheme is available in respect of qualifying donations provided a Gift Aid declaration is made and the gift is made by an individual.

The main conditions for a gift to be qualifying are that:

• The gift is payment of a sum of money;

• The payment is not subject to any condition as to repayment;

• The payment does not fall within the payroll giving scheme (see later); and

• The payment is not deductible in calculating the individual’s income from any source.

The Gift Aid declaration can be given direct to the charity or to an intermediary representing the charity, such as ‘JustGiving’.

The Gift Aid declaration must contain:

• the donor’s name and home address;
• identify the charity;
• identify the gift(s) to which its relates;
• confirm the gift(s) is a qualifying donation.

The charity must also state in writing (usually in the declaration) the possible tax charge if gifts are not fully covered by the donor’s tax liability.  The charity must keep an auditable record of declarations and statements.

The declaration and statement are usually incorporated in the form completed by the donor on which they authorise the charitable payment, or to which they attach a cheque.  Once a declaration is signed it will usually apply to all future gifts made to the charity as well as gifts made within the preceding four years.

It is important to note that in computing the tax that has been paid on the donor’s income to determine the amount of relief available, the notional tax on chargeable event gains under life assurance policies is excluded.

 

Claiming income tax relief

Gift Aid relief is available provided the donor is within the scope of UK tax ie. a UK resident or a Crown employee serving overseas, or a non-resident making the payment out of income or capital gains chargeable to UK tax.  The gross gift is deductible in computing income for tax credit purposes.

Although here are no statutory limits to the amounts which can be given via Gift Aid, in practice a limit will arise because a fully tax-efficient payment can only be made within the amount of tax otherwise payable by the individual. 

This is because if a taxpayer pays less income tax and/or capital gains tax than the amount recovered by the charity then the taxpayer will have to make good to HMRC an amount equal to the difference. 

Where relief is available it can be claimed through the donors self-assessment tax return or by an amendment to a tax code  If an individual is not required to submit a tax return they will need to use the P810 form which must be submitted by 31 January after the end of the previous tax year.

Where the individual has paid sufficient tax an election can be made to deem the donation to be made in the previous tax year.  Care must be taken to ensure that the donation being carried back is made before 31 January in the tax year and before the tax return for the previous tax year has been filed.   

 

Payroll giving schemes

This scheme allows an employee to make gifts to a charity by having sums deducted from their salary through PAYE by their employer. The donations are made after National Insurance contributions are calculated but before income tax is worked out and deducted. This means that the employee gets tax relief on their donation immediately - and at their marginal rate(s) of tax. The payroll giving scheme offers considerable scope for charitable fundraising provided both the employer runs (or is willing to start) a payroll giving scheme and the employee is willing to donate. These schemes are often popular to raise funds for local charities.

There is no upper limit to the amount that can be deducted. Employers are also able to make donations by deed of covenant. The scheme also extends to certain public bodies e.g. the British Museum. The cost of administration may put off some smaller employers.

As mentioned above, the employee receives tax relief at their marginal rate(s) of tax.

To donate £1, the following amounts have to be paid by the employee:

• 80p basic rate taxpayer
• 60p higher tax taxpayer
• 55p additional rate taxpayer

For an individual living in Scotland the corresponding figures are:

• 81p starter rate taxpayer
• 80p basic rate taxpayer
• 79p intermediate rate taxpayer
• 59p higher rate taxpayer
• 54p top rate taxpayer

 

Inheritance tax

Genuine outright gifts to a registered charity should be exempt from inheritance tax.

 

Conclusion

The tax incentives on offer make cash gifts by individuals to charities very attractive.

In the next article, we take a look at gifts of shares, land or property; and charitable legacies.