'Today, charitable tax breaks are worth a total of around £5bn a year… Yet the current system of Gift Aid sees hundreds of millions being lost every year. That has to change'.
This was the verdict from a recent Charity Tax Commission (CTC) report on how tax could facilitate a 'new wave of philanthropy'. It's not yet known which proposals the government will action, but the CTC has suggested significant revisions to the Gift Aid rules, and change could be in the air.
Under current rules, a donation to charity under the Gift Aid scheme means the charity can claim back 20% basic rate tax on the donation. For every £1 given, the government adds a 25p top up. Tax relief against 2019/20 income is also possible for charitable donations made between 6 April 2020 and 31 January 2021, providing payment is made before the 2019/20 tax return is filed.
Higher (40%) and additional rate (45%) taxpayers can currently reclaim the difference between the higher rate or additional rate paid, and basic rate on the donation. The principle is the same for Scottish taxpayers, for whom different tax rates apply.
Higher rate taxpayer: example
Felicity pays tax at 40% as a higher rate taxpayer. She gives £100 to a medical charity
The charity receives a £25 refund of Felicity's tax from the government, thus receiving funds of £125 in total
Felicity can claim back £25 (£125 x 20% - the difference between higher and basic rate tax). This cuts the net cost of her gift to £75.
The CTC suggests higher rate taxpayers should be empowered to pass this tax 'saving' to their chosen charity, by automatically donating the value of the additional tax relief to charity unless the donor opts out. This could raise a further £250 million for charity annually.
Many higher rate donors currently fail to claim the refund to which they're entitled. If you are eligible, make sure you claim, and remember to keep a record of your giving to facilitate this. You may then like to increas e your giving to match the ta x relief claimed.
The CTC also suggests simplifying the form-filling side of Gift Aid, by creating a central database, the Universal Gift Aid Declaration Database. This could allow taxpayers to complete a single, enduring, universal declaration covering all subsequent charitable gifts, rather than having to fill in multiple Gift Aid declarations.