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. [1]
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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.[2]
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:
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 |
|---|
Since 6 April 2008
| £100 | donation | |
| less | £25 | refund from HMRC in due course |
| Total cost to Mr X = | £75 |
|---|
Not all monies paid to HMRC during this transaction are refunded.
| £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.