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Gift Aid and why it matters

It always amazes me why so many people leave the submission of their Tax Return until just before 31 January deadline.  In doing so, I wonder how many remember to include a claim for donations they have made to charities.

I would imagine that almost all of us give to charity in some form or another, whether in the form of a regular monthly donation, an annual subscription to a charitable body or in sponsoring a friend to put his life at risk in an ill-advised attempt to run a half marathon. If you made a donation under Gift Aid, and you pay tax at the higher or additional rate, then you are due some tax back from HMRC and you should mention that to your accountant.

The Gift Aid regime is complicated and is best explained by an example:

During 2013/14, Andrew, a higher-rate taxpayer, makes a donation of £20 per month to a cancer charity. He also makes one-off donations totalling £50 and pays a subscription of £100 to a heritage body, allowing him and his family unrestricted access to that body's properties. All of these donations, totalling £390, are made under Gift Aid.

As Andrew makes those donations out of his after-tax income, some of the tax suffered can be reclaimed by the charity and Peter. The charity can, and no doubt will reclaim the basic rate tax on the donation (£97) thereby increasing the total of the donations to £487 (£390 + £97).

Andrew is able to apply to increase his basic rate band by £487, meaning that income of £487 will be taxed at 20% rather than 40%. This will save him tax of £97 reducing the total cost of the donations to £292.

Let's hope that Andrew does make the claim and is £97 better off as a result. However, my guess is that there are a lot of taxpayers out there who, by failing to make a claim for tax relief, donate to the Government every time they donate to a charity.

To avoid this, and to make January a better time for all, best follow these top 5 Gift Aid tips.

1. Look out for the words 'Gift Aid'. The chances are you are making donations under Gift Aid without actually noticing it. A good example is the cost of an annual subscription to a body like the National Trust.

2. Keep a folder into which you can put copies of the Gift Aid forms, etc. This can be given to your accountant when he or she comes to prepare your tax return saving you the trouble of searching through bank accounts, etc.

3. If you're a regular donor and an employee, consider asking HMRC to include your donations in your tax code. That way, you'll get relief earlier than would otherwise have been the case.

4. Consider applying to treat your donations as having been made in the previous tax year. This will speed up the relief and may mean that more relief is due if, for example, you are a higher-rate taxpayer now but paid at the additional rate last year.

5. If you pay tax at the higher or additional rates, but your spouse is a basic-rate taxpayer or does not pay tax at all, make sure that any donations made under Gift Aid are made by you and not your spouse. This is an important point as a basic-rate taxpayer receives no benefit from making donations under Gift Aid. And it could be even worse for an individual who pays no tax - they may be required to pay the tax received by the charity back to HMRC!

And what about donations made in the past? Don't rule these out as, subject to time limits, you are able to amend tax returns for earlier years, claiming the relief due to you plus interest.

If you would like more information on tax relief for donations made under Gift Aid, contact our tax team.

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