It’s a gift

A little fiscal exercise works wonders when you reach out to good causes

IF YOU make a donation to charity but do not use gift aid, you are needlessly diminishing the income of your chosen charity, as well as failing to reduce your own tax liability. Tax relief is available under the generous gift aid regime when making legitimate “qualifying” donations to charity — it must be “a sum of money” and the individual must derive virtually no benefit from the donation. Gift aid relief enables:

the charity to reclaim from HMRC an amount equal to the basic rate of tax (currently 20 per cent) on the donations made by the individual

higher-rate taxpaying individuals (40 per cent) and additional-rate taxpayers (45 per cent) to further personally claim higher/additional-rate tax relief on donations (example below).

However, gift aid is possible only if the individual has a UK tax liability greater than the basic-rate tax refunds to be claimed by the charities.

CHARITY VOUCHERS

An individual can open “a personal charity voucher” account by donating under gift aid to a charitable body operating these. They are similar in workings to a bank current account, with the amount of the actual donation(s) being paid into the “personal charity voucher” account.

The charitable body will claim back the basic-rate tax from HMRC and credit this additional sum, on receipt, to the individual’s account.

The individual is provided with charity vouchers (like a cheque book) which can be written to any valid charity up to the limit on the account (the amount of the gift aid donation(s) and the accompanying basic rate tax claim). Most charitable bodies do charge a small fixed percentage commission based on the gross donations.

Here is an example of the tax benefit in numbers. Mr Gevir, a 40 per cent higher-rate taxpayer, donates £100 by gift aid direct to the Charity for the Poor. Assuming this is “a qualifying donation”, the Charity for the Poor can reclaim from HMRC an extra £25 (£100/0.80 less £100, being the basicrate tax credit on the grossed-up £100 donation). Gevir can make a claim on his tax return for a refund of the higherrate tax of £25 (£125 multiplied by 20 per cent, ie the 40 per cent higher-rate of tax less the 20 per cent basic rate) resulting from his donation.

Therefore, at a net cost to Gevir of £75 (£100 donation less the £25 higherrate tax relief), the charity has received total payments of £125 (£100 from Gevir plus the £25 basic-rate tax credit from HMRC). Alternatively Gevir could make the £100 gift aid donation to a charitable body operating charity voucher accounts. The organisation would reclaim the £25 basic-rate tax credit from HMRC and apply it to Gevir’s charity account, to result in a total balance of £125.

Gevir could still give the Charity for the Poor a charity voucher for £100. In this case, however, the charity could not claim back the £25, as Gevir’s account has received this benefit. Gevir’s could, of course, have given a charity voucher for £125 — ignoring the above-mentioned commission — to enable the charity to be in the same financial position (the higher-rate tax refund of £25 claimed by the individual on his tax return is not affected).

The financial benefits to the 45 per cent additional-rate taxpayer are even greater. Using this example, the net cost to Gevir (assuming he is instead a 45 per cent additional rate taxpayer) of a £100 donation would be £68.75 (£100 donation less £31.25 tax relief) with the charity receiving the same £125.

Charles Pascoe is tax principal at BDO, charles.pascoe@bdo.co.uk

020 7893 2469

The above is not intended to be comprehensive or formal advice and is strictly without liability. Readers should consult an accountant on any matter concerning the above