What Is Gift Aid and How Does It Work?

Gift Aid is a United Kingdom government initiative that allows eligible charities and Community Amateur Sports Clubs (CASCs) to reclaim the basic rate of tax on monetary gifts from UK taxpayers. For every £1 donated, charities can receive an additional 25p from HM Revenue & Customs (HMRC), increasing the donation’s value at no extra cost to the donor.

Understanding Gift Aid Eligibility

Gift Aid applies when specific criteria are met by the donor, the donation, and the recipient organization. To qualify, the donor must be a UK taxpayer, paying UK Income Tax or Capital Gains Tax. The tax paid in a given tax year must equal or exceed the total Gift Aid claimed by all charities on their donations during that period. This includes tax paid through employment, self-assessment, or pensions.

Eligible donations are typically monetary, made from an individual’s own funds. This includes cash, cheques, direct debits, standing orders, and credit or debit card payments. Donations of goods, services, or money collected on behalf of others, such as corporate donations or funds from a bake sale, generally do not qualify, as the original donor’s identity and taxpayer status are required. For the charity, it must be recognized by HMRC and registered to claim Gift Aid.

Making a Gift Aid Declaration

To enable a charity to claim Gift Aid, a donor must provide a formal statement known as a Gift Aid declaration. This declaration serves as the donor’s official confirmation that they are a UK taxpayer and wish for the charity to reclaim tax on their donation(s) from HMRC. Donors can make a Gift Aid declaration through various common methods, including ticking a designated box on an online donation form, completing and signing a paper form, or providing an oral declaration confirmed in writing by the charity. Essential information required for a valid declaration includes the donor’s full name, home address, and a clear statement confirming their UK taxpayer status. A single declaration can cover a specific donation, all donations made in the past four years, or all future donations to that charity.

How Charities Reclaim Gift Aid

Once a charity receives a donation with a valid Gift Aid declaration, it can reclaim the basic rate tax from HMRC. Charities submit claims through HMRC’s online service, Charities Online, which facilitates the submission of documentation and information. The process involves providing HMRC with details of eligible donations and declarations. Charities compile this information in spreadsheets or use specialized software.

After processing, HMRC pays the Gift Aid amount directly to the charity, usually via a BACS transfer. The timeline for receiving these funds is generally around four weeks from the date of claim submission. Charities are required to maintain accurate records of all declarations and donations for at least six years after the most recent Gift Aid claim.

Donor Tax Responsibility

Donors are responsible for their tax position when making a Gift Aid declaration. They must ensure they have paid sufficient UK Income Tax or Capital Gains Tax in the relevant tax year to cover the total Gift Aid claimed by all charities on their donations. This means the tax paid must be at least equal to the 25p for every £1 donated that charities reclaim.

Higher-rate taxpayers (40% or 45%) can claim additional tax relief. They can reclaim the difference between the basic rate (20%) and their higher tax rate on the gross value of their donation, typically by including details on their Self Assessment tax return or contacting HMRC to adjust their tax code.

If a donor has not paid enough tax, HMRC may recover the shortfall directly from them. Therefore, it is important for donors to monitor their tax position. Donors should inform any charities they support if their tax situation changes and they no longer pay sufficient tax to cover the Gift Aid being claimed.