Did you know that there may be Tax Liabilities on Gift Aid Donations? This is a short warning for those individuals who generously give to charity, but who don’t pay sufficient tax during the year.

For basic rate taxpayers, gift aid relief is obtained by making donations to charities net of basic rate tax. The taxpayer then signs a gift aid declaration confirming they pay tax at at least the basic rate, which enables the charity to make a claim to HM Revenue and Customs (HMRC) for 20%, thereby increasing the overall donation. For example, if an individual makes a donation of £100, this amount is grossed up by 100/80 to make a gross donation of £125. The charity will therefore receive £100 from the individual and £25 from HMRC.

Tax Liabilities on Gift Aid Donations

For higher and additional rate taxpayers, they are able to claim relief at their marginal rate of tax via their self-assessment tax return each year, although the charity does not receive anything extra.

The issue arises when the individual does not pay enough tax to cover the 20% claimed by the charity. This could happen when an individual’s income falls during the year or where allowances, such as the personal allowance, increase. The result of not paying sufficient tax to cover the charity’s claim is that HMRC should recover any underpayment from the individual.

As an example, Jenny earns a salary of £25,000 per year and makes gift aid donations of £20 per month to the RSPCA. However, in May 2015 Jenny starts maternity leave and her income for the 2015/16 tax year is therefore significantly reduced, falling within her personal allowance. Jenny does not therefore pay any tax in 2015/16 and as a result HMRC will charge her £60, which is the basic rate tax on a gross donation of £300 (£20 per month, ie £240, x 100/80).

If Jenny wishes to avoid this charge she will need to cancel her gift aid declaration and not sign any further gift aid declarations during the 2015/16 tax year.

It is therefore recommended that low-income individuals are careful when signing gift aid declarations in order to avoid any unwanted liabilities at the end of the tax year.

If you would like further advice on potential tax liabilities on Gift Aid donations, please contact our Tax Team

For a list of all Gift Aid Regulations, please see Government Website here


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