How Gift Aid cuts your tax

What Gift Aid is

Gift Aid lets a charity claim back the basic-rate tax you already paid on the money you give. For every £1 you hand over, the charity claims an extra 25p from HMRC, so a £100 gift is worth £125 in the charity's hands. You need to be a UK taxpayer and to sign a short Gift Aid declaration, which is the charity's permission to make the claim.

Higher and additional-rate relief

The charity claims the basic-rate part itself. If you pay tax above the basic rate there is more relief on top, and that part is yours to claim, not the charity's. It works by widening your basic-rate band by the grossed-up gift, so more of your income is taxed at 20% instead of 40% or 45%.

On the same £125 grossed-up gift, a 40% taxpayer gets £25 back and a 45% taxpayer £31.25. You claim it through your Self Assessment tax return, or by asking HMRC to change your tax code.

The £100,000 rescue

This is where Gift Aid is worth the most. Once your income passes £100,000 your Personal Allowance is taken away, £1 for every £2 you earn above it, and by £125,140 it has gone entirely. A Gift Aid donation lowers the income that taper is measured against, by the full grossed-up amount, so a gift can pull you back under £100,000 and hand your allowance back.

It is the same rescue a pension contribution makes on your allowance, and inside the trap the tax it saves brings the real cost of the gift down to about half of what you hand over. You do not have to reach £100,000 exactly to gain, because every pound of the gift keeps cutting your tax at that high rate until you clear the band.

You must have paid enough tax

Gift Aid only works if you have paid at least as much tax as the charity reclaims. The charity claims 25% of your gift back from HMRC, so you need to have paid at least that much Income Tax or Capital Gains Tax in the same year. As a rule, your donations must be no more than four times the tax you have paid.

If you give more than your tax covers, HMRC can ask you to pay the difference. This mostly catches a low earner who gives a large amount, or someone whose income is mainly from a source Gift Aid does not count, such as tax-free savings.

Giving goods to a charity shop

Dropping goods at a charity shop can count for Gift Aid too, but not in the way most people expect. The shop sells the goods as your agent and treats the money raised as your donation, so Gift Aid is claimed on what the shop sells them for, less its commission, not on what the goods were worth new. A £20 coat that sells for £2 is a £2 donation, not a £20 one.

After the sale the shop writes to you with the net amount before it makes any claim, so the figure to count is the one in that letter.

If you pay Scottish income tax

Gift Aid works at the UK basic rate of 20% wherever you live, even though Scotland sets its own rates. If you pay Scotland's 19% starter rate the charity still reclaims 20%, and HMRC does not ask you to make up the 1% difference. Higher up, a Scottish higher or top-rate taxpayer claims the extra relief just as in the rest of the United Kingdom.

See what a donation does

Put your salary and a donation into the calculator. It shows the tax the gift saves you, your restored allowance if you were in the trap, and a warning if you have given more than your tax covers.