What Is Gift Aid Donation?
Gift aid donation brings out many benefits for taxpayers and the charity. It is actually a donation scheme introduced and being run by HMRC which states that the donation made by a UK taxpayer to a charity would be increased by 25%.
How does the Gift Aid Donation work?
In simple words, if a taxpayer wants to donate £100 to a charity, he/she just needs to donate £80, and the remaining 25% which equates to £20 (25% x £80) will be paid by HMRC to the charity.
There’s another benefit for the taxpayer. Adjusted Net Income (ANI) is the value that must be below £100,000 in order to qualify for the full personal allowance. If ANI increases beyond this threshold, personal allowance reduces by £1 for each £2 increase in ANI above £100,000.
The adjusted net income value comes from deducting gross gift aid donations & personal pension contributions from the net income of an individual.
Therefore, the more a taxpayer donates to the charity, the more their ANI is reduced, and the more it is reduced, the more chances arise to secure full personal allowance.
Tax planning can be done in this regard to donating to the charity the exact value which would be enough to reduce the taxpayer’s ANI to £100,000.
Features of Gift Aid Donation
Charities can claim gift aid on most donations, but some payments do not qualify.
A declaration must be given to charity and HMRC regarding such donation so that it could be put on record and relief claims could be secured. All donations made in the previous 4 years can be made via this way, if not claimed earlier.
Usually, a self-assessment tax return reports the things about the previous tax year but gift aid donation is one of the reliefs on which you can claim relief immediately even if you’ve made a donation in the current tax year. It must be done before 31st January.
Also, introducing such schemes creates an environment of promoting empathy so that people who can afford to donate could easily donate as it aligns their interest with that of the charity.
The claim to HMRC can be made either through a self-assessment tax return or by asking HMRC. In addition, Donations being claimed should never be more than 4 times the tax a person has paid in that tax year.
Example
For example, John donates £24,000 to charity. The charity claims gift aid to make John’s donation of £30,000. He has an employment income of £130,000.
John pays 40% tax so he can personally claim back £6000 (£30,000 x 20%).
Also, if he doesn’t make this donation, he will not be entitled to any amount of the personal allowance because his adjusted net income would exceed £125,000. But if he does make a gross gift aid donation of £30,000, his adjusted net income will be £100,000 and he’ll be entitled to a full personal allowance of £12,500 for the respective tax year.
