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Tax-Efficient Charitable Giving

Gift Aid Scheme


The Cyclone disaster in Burma and the Earthquake in Wenchaun China has led to a number of enquiries as to how to make tax-efficient charitable donations. It thus seems timely to issue a general reminder in this regard.

The 'Gift Aid Scheme' covers both one-off and more regular donations.

Charitable donations made under the 'Gift Aid Scheme' enable the charity to reclaim basic rate tax of 20% plus 2% transitional relief from the Government. Higher rate taxpayer donors are able to obtain additional tax relief via their tax return. Under the Gift Aid Scheme donations are deemed to have been made net of basic rate tax.

It is perhaps best explained by use of a simple example:

       Donation paid by you                                     £800

       Tax reclaimed by charity                                £226

       Total donation received by charity                £1,026

 

       Higher rate tax relief due to you                      £200

              

       Effective cost of donation                                £600

                       

The higher rate tax relief (40% less basic rate tax of 20% reclaimed by the charity, ie 20%) is of the grossed-up donation and is obtained via your tax return (assuming you advise me of the donation having been paid via the Gift Aid scheme).

To be effective the charity needs to receive from you a 'Gift Aid declaration', giving your basic details (name and address) and confirmation that you are at least a basic rate taxpayer. Most charities have their own standard form for this. To obtain the higher rate tax relief you should keep a record of your payment, including a note of when you made the Gift Aid declaration (as the declaration can also cover subsequent payments to the charity).

If you are considering making a donation to the Cyclone disaster in Burma then you can do so online at dec.org.uk and they have a 'tick the box' Gift Aid declaration on their online donation page, which you can print once completed (but before you press the 'send the donation' button).

If you make a number of small donations to a variety of charities and do not wish to be burdened by administrative paperwork you can still make these donations tax-effectively if you use a Charities Aid Foundation charity account. The Charities Aid Foundation (cafonline.org) is itself a charity and you are able to make one-off donations to this organisation.  They then provide you with an 'account' out of which you make transfers to other charities. It is the donation to the Charities Aid Foundation under the 'Gift Aid Scheme' that is the relevant donation for tax purposes. 

If your spouse is a basic rate taxpayer it is more tax-efficient for you to make Gift Aid payments in his/her place.  It is even more tax-efficient for you to make the donation if your spouse is a non-taxpayer, as they cannot make a 'Gift Aid' payment at all.