Self-assessment and tax relief on charitable donations

Self-assessment and tax relief on charitable donations

While December is a month of splurging, January is typically associated with cutting back – whether that’s on food, alcohol, or spending.

If one aim this year is to improve your financial situation, increasing income is just as important as reducing spending. One area often overlooked is finding ways to claim everything you’re entitled to. This is especially important if you’re one of more than 10 million people completing their self-assessment tax return ahead of the 31 January deadline. 

Self-assessment 

Self-assessment is a system used by HMRC to collect tax. If you’re an employee, tax is usually collected automatically from your monthly salary and shows up on your payslip. But if you’re self employed, or have additional sources of income such as savings interest or rental income, you have to declare your income to HMRC and offset against that any expenses that attract tax relief. The more tax relievable expenses, the less tax you have to pay, which means more money in your pocket.

So when you’re completing your tax return it pays to make sure you’re claiming all the tax relief you’re entitled to. 

Tax relief and Gift Aid 

I’ve previously written about higher rate taxpayers missing out on tax relief following a conversation with a client who was unaware she could be losing out to the tune of £1,700 a year by not claiming full tax relief on payments into her pension. 

A recent chat with another client brought up another form of tax relief people aren’t always aware of – tax relief on charitable donations.

It turned out my higher-rate-tax paying client was making regular donations to charity but had never declared this to the taxman as she was unaware she would be entitled to tax relief on her donations.

This raises the question: Do you know that if you’re a higher rate taxpayer, you can claim tax relief on charitable donations you’ve made through Gift Aid? Let me explain.

What is Gift Aid?

The Gift Aid scheme means that if you’re a UK taxpayer and you give money to charity, the charity can claim back the tax you’ve paid on this money. 

This is because Gift Aid donations are treated as if they are paid from your income after basic rate tax of 20% has been deducted.  

The charity claims this tax back direct from HMRC. So this boosts the amount you’ve given to charity but doesn’t cost you any extra.

So, for every £1 you give to charity, the charity can claim an extra 25p from HMRC.

Charities claim 25p on every pound given because basic rate tax of 20% is calculated on your gross (pre-tax) donation, not your net (after tax) donation. Here’s an example to explain:

  • You donate £100 to charity – the charity claims Gift Aid (£100 x 25p) to make your gross donation £125.
  • Your gross donation of £125 x basic rate tax of 20% = £100 after tax.

How does Gift Aid affect higher rate taxpayers?

Gift Aid allows charities to claim basic rate tax of 20% on your donation. But higher rate taxpayers pay 40% tax.   

So, if you’re a higher rate taxpayer, you can claim, from HMRC, the difference between the basic rate of tax claimed by the charity on your donation and the higher rate of tax you actually pay. Here’s an example to help explain:

  • Sue is a 40% taxpayer and donates £1,000 to charity. 
  • The charity claims back basic rate tax of 20% from HMRC. That’s 25p for every £1 donated so the charity claims £250, making Sue’s gross donation £1,250.
  • Sue can claim the difference between her 40% rate of tax and the basic rate of tax of 20% claimed by the charity on her gross donation. 
  • That’s a 20% difference. So, Sue claims 20% of £1,250 – a total of £250 – from HMRC.
  • If Sue was an additional rate taxpayer – paying 45% on her income – she would be able to claim the difference between her 45% rate of tax and the basic rate of tax at 20% claimed by the charity on her gross donation.
  • That would be a 25% difference. So Sue would claim 25% of £1,250 – a total of £312.50 – from HMRC.

Are you eligible to claim tax relief on charitable donations?

Are you a higher or additional rate taxpayer? 
The 40% higher rate of tax applies to anyone earning between £45,001 and £150,000 this current tax year. The 45% additional rate of tax applies to those earning more than £150,000. Find out more about income tax rates here.  

Do you give to charity through Gift Aid? 
Some 52% of those who donate money to charity said they used Gift Aid on their donation, according to the UK Giving 2017 report, by the Charities Aid Foundation. You'll need to complete a Gift Aid declaration form for each charity you wish to donate to. 
Please note: if you donate to charity though a payroll giving scheme at work, donations are taken out of your gross pay – that’s your pay before tax is deducted. So there’s no tax relief to claim. 

How do you claim tax relief?

Complete the charitable giving section on your annual self-assessment tax return or ask HMRC to amend your tax code which is used to calculate how much tax-free income you’re entitled to. You can reach HMRC on 0300 200 3300.

How long can you claim back for?

If you forget to – or were unaware you could – claim tax relief you have four years to submit a claim for tax ‘overpayment relief’ to HMRC. That’s four years after the end of the tax year your claim relates to.

For example, currently it’s the 2017/2018 tax year and it ends 5 April 2018, so you could claim as far back as the 2013/2014 tax year which ended 5 April 2014. 

For more information on this topic

Tax relief when you donate to charity.

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