Gift Aid
Encyclopedia
Gift Aid is a UK tax incentive
that enables tax
-effective giving by individuals to charities
in the United Kingdom
. Gift Aid was originally introduced in Finance Act 1990 for donation from 1 October 1990, but was originally limited to cash gifts of £600 or more. This threshold was successively reduced, until in 6 April 2000 the policy was substantially revised and the minimum donation limit removed entirely. A similar policy applies to charitable donations by companies
that are subject to UK corporation tax.
Gift Aid was originally intended for cash donations only. Since 2006 however, HMRC compliant systems have been introduced to allow tax on the income earned by charity shops acting as agent for the donor to be reclaimed, although to operate effectively, the charity needs HMRC-approved systems to be able to record and track the progress of each item from receipt to sale, and confirm with the donor that the donation should still go ahead.
Originally, declarations had to be made in writing. Declarations can now be made orally, but the charity must confirm the declaration in writing and keep a copy of the confirmation. If the taxpayer incorrectly makes a declaration, the charity is still able to reclaim the tax that should have been paid on the gift, but the individual is required to pay the same amount to HMRC to make up the difference.
Gift Aid can only be reclaimed on money donated by UK taxpayers. Non-UK taxpayers can make donations but the donation will not be eligible for a tax reclaim from HMRC.
The first charity to introduce Gift Aid on donated goods - where the tax is reclaimed on the value of the goods when sold - was Sue Ryder Care.
Mr X is a higher-rate taxpayer, paying 40% income tax on part of his income. He has made a Gift Aid declaration to the charity. As a result:
After 2011
The giver has only really donated £75 of net income, despite having made a payment of £100.
Tax incentive
A tax incentive is an aspect of the tax code designed to incentivize, or encourage, a certain type of behavior. This may be accomplished through means including tax holidays, tax deductions, or tax abatements...
that enables tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
-effective giving by individuals to charities
Charitable organization
A charitable organization is a type of non-profit organization . It differs from other types of NPOs in that it centers on philanthropic goals A charitable organization is a type of non-profit organization (NPO). It differs from other types of NPOs in that it centers on philanthropic goals A...
in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. Gift Aid was originally introduced in Finance Act 1990 for donation from 1 October 1990, but was originally limited to cash gifts of £600 or more. This threshold was successively reduced, until in 6 April 2000 the policy was substantially revised and the minimum donation limit removed entirely. A similar policy applies to charitable donations by companies
Company
A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...
that are subject to UK corporation tax.
Gift Aid was originally intended for cash donations only. Since 2006 however, HMRC compliant systems have been introduced to allow tax on the income earned by charity shops acting as agent for the donor to be reclaimed, although to operate effectively, the charity needs HMRC-approved systems to be able to record and track the progress of each item from receipt to sale, and confirm with the donor that the donation should still go ahead.
Details
Gift Aid allows individuals who are subject to UK income tax to complete a simple, short declaration that they are a UK taxpayer. Any cash donations that the taxpayer makes to the charity after making a declaration are treated as being made after deduction of income tax at the basic rate (20% in 2011), and the charity can reclaim the basic rate income tax paid on the gift from HMRC. For a basic-rate taxpayer, this adds approximately 25% to the value of any gift made under Gift Aid. Higher-rate taxpayers can claim income tax relief, above and beyond the amount claimed directly by the charities. The rate of the relief for higher-rate taxpayers in 2011 is usually 20%, the difference between the basic rate (20%) and the higher rate (40%) of income tax, although recipients of dividend income (taxed at 10% and 32.5%) can achieve a higher rate of tax relief (22.5%).Originally, declarations had to be made in writing. Declarations can now be made orally, but the charity must confirm the declaration in writing and keep a copy of the confirmation. If the taxpayer incorrectly makes a declaration, the charity is still able to reclaim the tax that should have been paid on the gift, but the individual is required to pay the same amount to HMRC to make up the difference.
Gift Aid can only be reclaimed on money donated by UK taxpayers. Non-UK taxpayers can make donations but the donation will not be eligible for a tax reclaim from HMRC.
The first charity to introduce Gift Aid on donated goods - where the tax is reclaimed on the value of the goods when sold - was Sue Ryder Care.
A practical example
- Mr X donates £100 to charity.
Mr X is a higher-rate taxpayer, paying 40% income tax on part of his income. He has made a Gift Aid declaration to the charity. As a result:
- the £100.00 gift is treated as being made after deduction of basic rate tax at 20%. The grossGross (economics)In economics, gross means before deductions. The antonym is net, meaning after deductions.-Usage:In this sense, it may appear an adjective, following the noun it modifies, e.g., "earned two million dollars, gross"...
value of the gift before tax is £125 - this is the amount of money a basic rate taxpayer would need to earn to receive £100.00 after tax. - the charity can claim the £25 of basic rate tax (£100.00 × 20/80) that the taxpayer is treated as having paid on the gift, effectively an extra 25% on top of the value of the £100.00 donation (although until April 2011 a special supplement of £3.21 is paid by HMRC, so that the charity receives the same benefit as before basic rate tax was changed from 22% in April 2008)
- as a higher-rate taxpayer, Mr X can also claim back 25% of the gift, £25 (£100.00 × (40 - 20)/80), when he makes his tax returnTax returnA tax return is a tax form that can be filed with a government body to declare liability for taxation in various countries:* Tax return * Tax return * Tax return * Tax return...
.
The benefits to the charity
For 2008-11| £100 | donation | |
| £25 | refund from HMRC | |
| £3.21 | supplement from HMRC | |
| Total to charity = | £128.21 |
|---|
After 2011
| £100 | donation | |
| £25 | refund from HMRC | |
| Total to charity = | £125 |
|---|
The cost to the donor
Since 6 April 2008| £100 | donation | |
| less | £25 | refund from HMRC in due course |
| Total cost to Mr X = | £75 |
|---|
Revenue to HMRC
Not all monies paid to HMRC during this transaction are refunded.- Any National InsuranceNational InsuranceNational Insurance in the United Kingdom was initially a contributory system of insurance against illness and unemployment, and later also provided retirement pensions and other benefits...
contributions paid by the employer and employee are not refunded. - Although all income tax paid by the higher-rate taxpayer is refunded, the way this is implemented has the effect of making the cost of the donation smaller than the higher-rate taxpayer may have intended as the following example illustrates:
£125.00 total received by charity £125.00 gross income before taxes less £25.00 the refund from HMRC to the charity less £50.00 higher rate (40%) imposed on giver equals £100.00 paid to charity equals £75.00 net income received by giver less £25.00 the refund from HMRC to the giver less £75.00 cost of donation to giver equals £75.00 cost of donation to giver £0.00 difference kept by HMRC
The giver has only really donated £75 of net income, despite having made a payment of £100.
- If the charity does not reclaim the tax this money stays with The Treasury.
- If the giver does not submit a properly completed self-assessment, the refund to the giver stays with The Treasury.