The foundation of giving
22 December 2022
HMRC has issued statistics outlining the amount of Gift Aid relief claimed in the year ended 5 April 2021 has declined from the previous year – both in number and amount. The number of individuals declaring a donation via self-assessment has decreased by 4%, and the total value of donations has dropped by 8%. Unsurprisingly those with higher incomes are still making sizeable Gift Aid donations. Coupled with the desire to help those less fortunate, part of the decision to donate may be the tax relief that can be claimed by the donor.
When a Gift Aid election is made, a charity can reclaim an additional 25% of the amount of the charitable donation from HMRC, which assumes that the donor has paid basic rate income tax on the amount gifted. Higher or additional rate taxpayers may obtain tax relief on such qualifying Gift Aid donations by including them in their self-assessment tax returns. Relief for Gift Aid donations is given by way of an extension to the basic rate band by the amount of the gross donation. This ensures that a charitable gift has only suffered tax at the basic rate, which the charity is able to reclaim thanks to the Gift Aid election. This can knock 20% of the value of a qualifying donation off a higher rate taxpayer’s tax bill and 25% off an additional rate taxpayer’s tax bill. Gift Aid donations can give rise to more substantial tax relief, of up to 40%, for taxpayers with a total income of between £100,000-£125,140 as these donations also reduce the individual’s net income for tax purposes, which may result in them retaining more of their personal allowance which may otherwise be tapered.
Where an individual realises this as part of their tax return preparation, there is an opportunity to relate back a gift aid donation now to reduce the tax liability for last year.
The opportunity exists not only for those who have high incomes. For taxpayers who have sold assets at a large gain, such as on a transaction, it isn’t unusual for there to be a desire to ‘give back’ by making a sizeable charitable donation. The rate of capital gains tax (CGT) payable by an individual is calculated with reference to the amount of basic rate income tax band an individual has left.
Where an individual makes a gift aid donation, the basic rate band is extended, and this also reduces the CGT due on a disposal by increasing the amount of the taxable gain taxed at the lower rate of CGT of 10%.
By timing a donation, the relief can be meaningful, and there is an opportunity to relate a claim back to the previous tax year – provided the payment and claim are made both before the original return is submitted and in advance of the 31 January 2023 deadline.
For philanthropic taxpayers who are minded to creating a foundation to structure their charitable activities, particularly post transaction, the timing of the payment could mean a cashflow advantage and a significant reduction in the amount of tax payable. For those who sold in 2021/22 and haven’t yet submitted their tax return, there is still time in advance of the 31 January 2023 deadline to donate.
When a Gift Aid election is made, a charity can reclaim an additional 25% of the amount of the charitable donation from HMRC, which assumes that the donor has paid basic rate income tax on the amount gifted. Higher or additional rate taxpayers may obtain tax relief on such qualifying Gift Aid donations by including them in their self-assessment tax returns. Relief for Gift Aid donations is given by way of an extension to the basic rate band by the amount of the gross donation. This ensures that a charitable gift has only suffered tax at the basic rate, which the charity is able to reclaim thanks to the Gift Aid election. This can knock 20% of the value of a qualifying donation off a higher rate taxpayer’s tax bill and 25% off an additional rate taxpayer’s tax bill. Gift Aid donations can give rise to more substantial tax relief, of up to 40%, for taxpayers with a total income of between £100,000-£125,140 as these donations also reduce the individual’s net income for tax purposes, which may result in them retaining more of their personal allowance which may otherwise be tapered.
Where an individual realises this as part of their tax return preparation, there is an opportunity to relate back a gift aid donation now to reduce the tax liability for last year.
The opportunity exists not only for those who have high incomes. For taxpayers who have sold assets at a large gain, such as on a transaction, it isn’t unusual for there to be a desire to ‘give back’ by making a sizeable charitable donation. The rate of capital gains tax (CGT) payable by an individual is calculated with reference to the amount of basic rate income tax band an individual has left.
Where an individual makes a gift aid donation, the basic rate band is extended, and this also reduces the CGT due on a disposal by increasing the amount of the taxable gain taxed at the lower rate of CGT of 10%.
By timing a donation, the relief can be meaningful, and there is an opportunity to relate a claim back to the previous tax year – provided the payment and claim are made both before the original return is submitted and in advance of the 31 January 2023 deadline.
For philanthropic taxpayers who are minded to creating a foundation to structure their charitable activities, particularly post transaction, the timing of the payment could mean a cashflow advantage and a significant reduction in the amount of tax payable. For those who sold in 2021/22 and haven’t yet submitted their tax return, there is still time in advance of the 31 January 2023 deadline to donate.
Kate Aitchison
Partner, Tax
AUTHOR
Kate Aitchison
Partner, Tax