Using Gift Aid to Reduce Your Income Bill

As the new year begins, it’s a perfect moment to embrace fresh beginnings and think about positive ways to make a difference. Supporting charities is one way to do this, helping others while also making the most of your finances.

In this blog, we’re looking at Gift Aid, a simple way to make your donations go further and reduce your tax bill at the same time.

What Gift Aid Is And How It Works?

Gift Aid allows UK charities and community amateur sports clubs to reclaim the basic rate of tax on donations made by UK taxpayers.

For every £1 you give, the charity can claim an extra 25p at no extra cost to you. To qualify, you must have paid enough Income Tax or Capital Gains Tax during the same tax year to cover the amount reclaimed by the charity. If not, HMRC may ask you to repay the difference, so it’s worth checking before making your declaration.

Benefits For Higher And Additional Rate Taxpayers

If you pay tax at the higher rate (40%) or the additional rate (45%), you can claim back the difference between your tax rate and the basic rate on the grossed-up value of your donation.

For example, if you donate £100, the gross amount is £125, and you can reclaim £25 or £31.25, depending on your rate of tax.

For those earning over £100,000, Gift Aid can also help restore some or all of your personal allowance. For every £2 of gross donations, £1 of allowance can be reinstated, giving effective tax relief of up to 60% when combined with the extended basic rate band.

Gift Aid and Child Benefit

If you or your partner receives Child Benefit and one of you earns more than £60,000, you may face the High Income Child Benefit Tax Charge. The charge removes 1% of the benefit for every £200 of income above £60,000, and the benefit is lost completely at £80,000.

Donating under Gift Aid reduces your adjusted net income by £1.25 for every £1 given. This can bring your income below the threshold, reducing or removing the charge. The same principle applies if your income exceeds £100,000, as Gift Aid can help you regain your personal allowance and avoid the steep effective tax rate that applies in that band.

Planning Gift Aid As Part Of Your Finances

Gift Aid can be a useful element of personal tax planning, particularly for those who pay higher or additional rate tax. If you have variable income or are self-employed, making charitable donations in a higher-earning year can help reduce your taxable income.

Regular charitable giving can also play a part in estate planning by reducing the size of your taxable estate and potentially lowering future Inheritance Tax liabilities, while ensuring your chosen causes receive greater benefit.

In Summary

Gift Aid is a simple and effective way to support the causes that matter to you while improving your own tax efficiency. With careful planning, it can form part of your wider financial strategy.

If you would like to discuss how charitable giving could work for you, our team will be happy to help.