QUESTION: I want to make a substantial donation to a charity this Christmas. Can I claim tax relief on charitable donations and what do I need to do?
ANSWER: While there are many worthy causes that would be grateful for your support this Christmas period, it could benefit you also when it comes to preparing your personal tax return.
When an individual gives money to a charity or a community amateur sports clubs (CASCs), and they make a Gift Aid declaration, it is considered a Gift Aid donation. The amount donated is treated as if it was made after deduction of income tax at the basic rate in force for the tax year of gift; for example, a donation of £1,000 in 2021-22 is deemed to have been paid after deduction of income tax of £250 (1,000 × (20/80)).
This has two consequences. Firstly, the charity may reclaim the income tax (£250 in this example) from HMRC to boost your initial donation. Secondly, the individual is assessed to income tax by reference to the grossed-up amount of the donation (£1,250 in the example).
This means the individual can extend both their basic rate and higher rate bands, it also reduces their adjusted net income when calculating any required restrictions to their personal allowance.
The amount of the grossed-up donation is added to the individual’s basic rate and higher rate bands for the year of gift. The main consequence of this is that it reduces the amount of income that is taxed at the higher and additional rates.
Returning to our example, and assuming that the donor is a higher rate taxpayer, that person’s basic rate band will be increased by £1,250 to £38,950. This means that income of £1,250 will be taxed at 20 per cent, rather than 40 per cent, saving the donor tax of £250.
Therefore, the cost of the donation to the individual falls to £750 (£1,000 minus £250). The donor has the option of treating the donation as having been made in the previous tax year, meaning any donations made this Christmas could reduce your 2020/21 Income Tax liability due on January 31 2022.
Not intended to take the shine off your donation but there is no additional benefit for a basic rate taxpayer as the tax saving goes directly to the charity, and a non-taxpayer should tread carefully when making a Gift Aid declaration. If insufficient tax has been paid to cover the amount reclaimed by the charity, HMRC could seek to recover the lost funds from the donor.
There is another consequence of the extension of the basic and higher rate bands that is often overlooked: a person’s savings allowance is reduced from £1,000 to £500 where they pay tax at the higher rate and is removed entirely where they are additional rate taxpayers.
The making of a Gift Aid donation could have a significant impact on a person's tax liability where that person has income just over the basic rate or higher rate band. A similar point applies with regard to the transferrable marriage allowance.
It is important to be aware of the reliefs available for Gift Aid donations before deciding if and how to give to charity. For accountants and tax advisers, it is important to ensure that clients remember to let you know when they have made a Gift Aid donation in order to ensure they get the right amount of tax relief.
:: KellyAnne Murtagh (k.murtagh@pkffpm.com) is senior manager at PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
