How Does Gift Aid Work? 7 Key Questions Answered

Gift Aid is big business and good news. In total Gift Aid is worth over £1 billion to charities each year providing a valuable income stream to charities large and small, including those supported by you!

The Gift Aid scheme allows a UK charity to claim back the tax that you pay, as a donor, when you earn the money from which you make the donation. Eligible donations from UK taxpayers attract Gift Aid at a rate calculated in accordance with the basic rate of income tax. So with basic rate income tax at 20%, an eligible £10.00 gift from a UK taxpaying donor is worth £12.50 in the hands of a charity after Gift Aid is reclaimed.

So, you earn £12.50 of taxable income and pay 20% in income tax (£2.50). You give £10.00 to a charity, and the £2.50 of tax that you have paid is refunded to the Charity by HMRC under the Gift Aid scheme.

Whilst generally straightforward, what are the key questions for donors to understand when using the scheme?

1. Am I a UK taxpayer?

More than half of the adult population in the UK are not taxpayers for the purposes of Gift Aid. For a charity to be able to claim Gift Aid on a donation, the donor must have paid tax (that is generally income tax but does also include capital gains tax) at least equal to the amount of the Gift Aid claim submitted by the charities that you support. VAT, council tax and other taxes do not count!

Warning: If you pay less tax than that claimed back by the charities that you support, you (the donor) are liable to make up the shortfall to HMRC.

2. Can I support more than one charity?

You can directly support as many UK charities as you wish using the Gift Aid scheme so long as:

• Generally, you complete a Gift Aid declaration form (see later) for each charity that claims Gift Aid on your donations;
• The total Gift Aid reclaimed by all the charities that you support does not exceed the total tax that you have paid (see earlier warning).

3. Is my donation eligible for Gift Aid?

To be eligible for Gift Aid, donations must be freewill gifts from your own funds. The following are not eligible for Gift Aid:

• Donations made in return for tickets (e.g. raffle, events, cake sales and auctions);
• Donations made on behalf of someone else or a group of people (unless a sponsored event or a collection made at a funeral);
• Donations made of behalf of a company;
• Donations made where you, or a close family member, directly benefits from your donation

4. What about donations of goods to charity shops?

If you pay sufficient UK tax (as stated above) you can also Gift Aid donations of goods to a charity shop. However, as Gift Aid is about gifts of money rather than goods, Retail Gift Aid (RGA) works in a slightly different way. There are three different forms of RGA scheme but all achieve the same objective. The goods are sold on your behalf so that the net cash proceeds then become a gift of money by you to the charity under the Gift Aid Scheme. You must complete a Gift Aid declaration and the shop will tell you how much has been given once they have sold the goods (subject to net proceeds being at least £20). The charity will be able to reclaim tax on your gift from HMRC in the normal way.

5. What paperwork do I need to complete?

For each charity that you directly support, you will need to complete a Gift Aid declaration form. This form will be provided to you by the charity and should be retained by them (you may want to keep a copy). Often, Gift Aid declaration forms are worded to cover all future gifts that you make to that charity. Where this is the case, and if you no longer wish a charity to claim Gift Aid on your donations, you must inform them.

Remember, if you have not paid enough tax and the charity continues to claim Gift Aid, you will be liable for any shortfall.

6. Can a charity claim more if I am a higher rate taxpayer?

No. The scheme is based solely on basic rate income tax. However, as a higher rate taxpayer, there may be an additional tax repayment to you as a donor. HMRC guidance can be found here.

7. What records should I keep?

HMRC states that donors should keep records of donations in a number of situations. This applies to higher rate taxpayers or others needing to submit a tax return, people claiming tax credits and those claiming higher personal allowances or claiming a married couple’s allowance. The guidance suggests that you keep records showing the date, the amount and the name of the charity donated to.

Even where you are not claiming tax back we strongly suggest that you keep record of:

• All active Gift Aid declarations;
• Any correspondence with charities, particularly where you have instructed them to no longer claim Gift Aid on your donations;
• Donations made;
  • Date;
  • Recipient;
  • Donation;

These records will be important in the event of any HMRC enquiries.

The Gift Aid scheme has been a great benefit to many charities over the years. With a little understanding and some basic record keeping, donors can make the fullest use of the scheme possible.

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Gift Aid: The Basics for Charities