Making donations to charities? How to make it tax efficient for the charity and for you

Rachel Skells

Article by:

Rachel Skells


Many people are aware that tax relief can be claimed by the charity when donations are made under gift aid. However, they are not always aware of how they may be able to personally receive tax relief or indeed, many will be unaware of the circumstance in which they could have an unwelcome tax bill as a result of their gift aid donations.

This article therefore highlights some tips and traps associated with gift aid donations.

Have you made gift aid payments?

Gift aid is a tax efficient way for UK taxpayers to make donations to UK/EEA registered charities.

Donating through gift aid means that charities can claim an extra 25p for every £1 they receive.

If an individual is a higher rate taxpayer, they can also benefit by obtaining relief for the donation on their tax return. The individuals basic rate band is extended by the gross charitable donation and therefore increases the proportion of your income taxed at lower rates.

For example, if a higher rate taxpayer (40%) donates £100 to charity, their basic rate band is extended by £125.  The charity claims 20% tax from HMRC as it normally would, however, the taxpayer also benefits from the donation as now £125 of income that would have been taxed at 40%, is now taxable at 20%. The result is that the taxpayer receives additional tax relief of 20% by paying less higher-rate tax.

In addition, if an individual is an additional rate tax payer, (45%) then income tax relief increases to 25%.

For additional rate tax payers the tax-free personal allowance (£12,500 for 2022/23) reduces by £1 for every £2 of income above £100,000. However, gift aid donations extend the £100,000 threshold, such that the personal allowance is restored by £1 for every £2 of gross gift aid donations. The combined effect of the extended basic rate band and the restored personal allowance gives an effective rate of tax relief of 60%.

The easiest way to make a claim for gift aid donations is to do so through a self-assessment tax return.

TIP: Get relief sooner

Individuals who make regular donations may well be familiar with the way in which tax relief can be claimed, however, is there a way to get relief sooner which many are not aware of?

This flexibility essentially allows an individual to carry back gift aid donations they make in the current tax year, up to the date they file their return, to the previous tax year if they want to claim relief sooner or will not be a higher rate tax payer in the current year, but they were in the previous year.

For example, when an individual was completing their 2021/22 tax return, they could have claimed gift aid donations made during the period 06.04.2021 – 05.04.2022 and they could have included any donations made in the current year (2022/23), up to the point they submitted their tax return, by the 31 January 2023 deadline.

TRAP: What if you have not paid enough tax?

However, be aware of the rules if you have not paid enough tax. This might be something to be mindful of if your income fluctuates.

When an individual is making a gift aid declaration, they are stating that they will have paid enough tax during the year to cover the 20% tax the charity will reclaim from HMRC.  If it turns out the individual hasn’t paid enough tax, then they will need to make good the tax claimed!

 What about making donations to overseas charities

Taxpayers who make donations to charities in other countries can qualify for tax relief in the UK under certain circumstances. This means that UK charitable tax reliefs are available to certain organisations which are the equivalent of UK charities and Community Amateur Sports Clubs (CASCs) in the EU, Norway, Iceland and Liechtenstein (referred to as the EEA) provided they meet the UK tax definition of a charity. The charity would also need to be recognised by HMRC in order for taxpayers to claim relief.

The treatment of donations to charities outside the EEA area is different and in most cases the donations do not qualify for tax relief as the charities are not recognised entities for charitable purposes. For this reason, many large foreign charities that attract donations from the UK may decide to register with the Charity Commission in England and Wales. There are different rules in Scotland and Northern Ireland. This is quite a complex area and there are many requirements that must be met in order to register as a charity.

If the charity meets the UK definition of a charity, then UK higher rate or additional rate taxpayers, will be entitled to claim relief on the difference between the basic rate and their highest rate of tax made on an eligible donation.

For example:

If a taxpayer donated £5,000 to charity, the total value of the donation to the charity is £6,250. They can claim back additional tax back of:

£1,250 if they pay tax at the higher rate of 40% (£6,250 × 20%),

£1,562.50 if they pay tax at the additional rate of 45% (£6,250 × 20%) plus (£6,250 × 5%).

Higher rate or additional rate taxpayers have the option to carry back charitable donations to the previous tax year. A request to carry back the donation must be made before or at the same time as the previous year’s Self-Assessment return is completed.

This article gives you an overview of the key aspects specific to gift aid donations but there are other rules in relation to charitable donations and gifts that should be considered. We would always recommend, especially if there is a sizeable donation to be made, that advice is sought.

Our team has a wealth of knowledge from tax tips when preparing your tax returns, to advice around more complex tax planning for the future. For help with your tax affairs please get in touch.