Donations to charity over the course of a tax year can add up and taxpayers must ensure they keep a proper record of all donations to record them on their tax return. Donations that are made through the Gift Aid scheme allow for the recipient charity to claim 25p worth of tax relief on every pound donated. Higher rate and additional rate taxpayers are eligible to claim relief on the difference between the basic rate and their highest rate of tax.
For example:
If a taxpayer donates £500 to charity, the total value of the donation to the charity is £625. The taxpayer can claim additional tax back of:
- £125 if they pay tax at the higher rate of 40% (£625 × 20%),
- £156.25 if they pay tax at the additional rate of 45% (£625 × 20%) plus (£625 × 5%).
A higher rate or additional rate taxpayer who wants to reduce their tax bill for the last tax year could decide to make a gift to charity in the current tax year and then elect to carry back the contribution to the previous year. A request to carry back the donation must be made before or at the same time as the previous year’s self assessment return is completed.
Planning note
This can be a useful strategy for taxpayers paying tax at a higher marginal rate. For high earning taxpayers the personal allowance is gradually reduced by £1 for every £2 of income over £100,000 irrespective of age. This creates an effective marginal rate of tax of around 60% for taxpayers with annual income between £100,000 and £123,000 as the current £11,500 tax-free personal allowance is gradually withdrawn.
Please get in touch if you would like to discuss your planning options.