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Why it pays to use the Gift Aid option.

Byline: TAX TALK Colin Barratt

UNDER the Gift Aid scheme, donations to charity are deemed to have had basic rate tax relief deducted by the donor.

The charity will receive not just the amount of donation but the tax deemed to be withheld.

For individuals who are liable to basic rate tax, broadly those with gross income of up to PS41,865 there will be no further tax relief due on the Gift Aid donations made.

But higher rate taxpayers will be able to obtain a tax refund on their donations equivalent to 25% of the amount paid. For instance, if an individual pays PS80 to charity it will get PS80 plus the PS20 tax "withheld" giving it PS100 and the individual can claim a higher rate tax relief of PS20 meaning the PS80 donation has actually cost them PS60.

For those liable to additional rate tax of 45% which starts where taxable income exceeds PS150,000, they will be able to claim even more tax back on any Gift Aid donations made.

For those with income over PS100,000 the personal allowance will taper away and an individual with an income above PS120,000 will receive no personal allowance at all.

Individuals with income falling in this range who make a Gift Aid donation will obtain a tax refund equivalent to 50% of the net payment. (Pay PS80 and you get back PS40, a net cost of PS40 and the charity gets PS100).

Those couples affected by the taxation of Child Benefit, where one spouse has income above PS50,000, the payment of a Gift Aid donation to reduce income below this threshold may be worth considering thus ensuring the benefit is received in full as well as gaining higher rate tax relief on donation made.

An individual is usually required to sign a Gift Aid declaration confirming that they have paid or will pay an amount of Income Tax and/or Capital Gains Tax for each tax year that is at least equal to the amount of tax that the charity will reclaim on the gift made. The declaration can cover current and future donations as well as gifts made in the past four tax years.

Non-taxpayers should not complete this declaration meaning that the charity will receive only PS80, as in the examples above.

Should an individual having completed a Gift Aid declaration find their circumstances change so that they end up not having paid tax or insufficient tax to cover the amount reclaimed by the charity, HMRC would regard them as being liable to repay the tax recovered by the charity, although in practice they will initially look to the charity to repay the tax claimed in error.

Tax relief on Gift Aid donations is usually allowed in the year of payment.

However, an election can be made, normally through the Self-Assessment Tax Return, to carry back a later year's donation to the previous tax year.

The availability of this election allows an individual to obtain higher rate tax relief in one year if they know they will only be liable to tax at a lower rate in another year.

It is too late to carry back from this year to last year, but next year's donation could be carried back to this year when your Tax Return is being completed.

For married couples suffering different rates of tax it would be sensible for Gift Aid donations to charities to be made by the spouse who is the highest rate taxpayer as they are able to obtain the optimum relief for these payments.

How many times do you make Gift Aid donations and forget to claim relief? If you are a higher rate taxpayer make a diary note every time you do, you might be surprised!
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Title Annotation:Business
Publication:Huddersfield Daily Examiner (Huddersfield, England)
Date:Mar 24, 2015
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