Gift aid enables charities to reclaim basic rate tax on any donations made under the Gift Aid scheme. For most charities Gift Aid Donations represent a significant addition to their income – £2.50 for every £10 donation. Taxpayers are usually very happy to sign a Gift Aid Declaration as it increases their gift without them having to pay any more money. And if you are a higher rate taxpayer then there is benefit to you also as you can claim on your tax return the difference between the basic rate and your highest marginal rate so that you may receive a tax refund or at least reduce your liability. So, everyone wins!
However, there can be problems if your income is lower or fluctuates from year to year. If you make more in Gift Aid Donations than the tax you pay then the charity will reclaim tax from HMRC and then HMRC will ask for it back from you when you file your tax return. Not such a great result! And it’s not just those on lower incomes that might suffer. Say, for example, you have sold your business and out of the profit make a generous donation to your favourite charity only to find you didn’t have enough income in the year of donation to cover the tax reclaimed.
And HMRC appear to be being more aggressive in reclaiming any tax that is due, so beware! The introduction of the £5,000 dividend allowance and £1,000 personal saving allowance next year is likely to make the problem worse. The new allowances may remove your tax liability but potentially leave you with an unexpected tax bill if you have already existing Gift Aid Donations being made.
Hopefully people won’t stop being generous but they will need to review their Gift Aid Donations and instruct the charity they give to when to treat their donation as being subject to Gift Aid.