How does Gift Aid work?

Four women laughing together after completing charity fun run.

Gift Aid is a UK government scheme that allows charities to claim back basic rate tax on donations made by UK taxpayers. If you are adding a donation to a charity Pot, then you will be asked if you wish to claim Gift Aid on your donation. Not sure what to click or if it’s for you? Or are you wondering how Gift Aid works for charities?  We will cover details of the scheme, eligibility criteria and claiming process and more. Get ready to be a Gift Aid expert!  

What is Gift Aid?

Gift Aid means simply, that charities get a top up of donation money from HMRC.

For every one pound you give to the charity HMRC can give 25p.

How does Gift Aid work – and where does the money come from? There are no money trees, as we all know – and in short, Gift Aid comes from UK taxpayers.

Gift Aid is an income tax relief designed to benefit recognised charities and community amateur sports clubs (CASCs). It could even be a church. Size doesn’t matter as long as they are registered with HMRC, have a registered charity number and are based in the UK or European Economic Area.

These institutions get extra money from taxpayers, but when you say ‘yes, give Gift Aid’ you are personally not liable for the extra (in most circumstances.)

There is no upper or lower limit on the amount someone can donate, or which a charity can claim.

Here’s how it works. 

You want to give the charity £100 pounds. If you tick the apply Gift Aid box, the charity can then apply to HMRC for a top-up.  Your £100 becomes £125 pounds that the charity receives. (Based on a basic taxpayer rate.) Yet you only have £100 leave your bank account.

To quickly calculate this for any amount to see what a charity could get, take the donation size, times it by 20 and then divide this figure by 80.

How do you give a charity Gift Aid?

How does Gift Aid work for charities and how do they get your money?

If you’ve ever donated online to a charity or for a cause, you may have seen a sign asking you to confirm if you’d like to add Gift Aid or ‘Gift Aid your donation’.

The actual wording is usually something such as:

“I confirm I am a UK taxpayer and would like (charity name) to reclaim tax on this donation, any future gifts I make, and any donations I have made in the past four years. I understand that if I pay less Income or Capital Gains Tax than the amount claimed on all my donations in that tax year (April 6 – April 5) it is my responsibility to pay any difference.”

This can also be a declaration that you make orally, for example, in a shop when donating goods – if it captures their name, house number and postcode.

While many of us just tick the box, reasoning that the charity gets extra money, which can only be a good thing, there are instances when you as an individual will have to pay the top-up amount personally.

Note that this is a guide that covers how does Gift Aid work in the UK – for other countries there are various rules around tax implications.

But wait! Gift Aid comes in two flavours.

If you have been wondering how does gift aid work if you are a super small charity or organisation – you may need GASDS.

For donations over £30, donors need to sign a Gift Aid declaration, which must be retained on file for 6 years.  Yet, for small donations charities can claim for donations of up to £30, with less administration, using the Gift Aid Small Donations Scheme (GASDS). 

That means if you have a charity tin or collections bucket, you don’t have to be asking for details of where they live and getting verbal agreements. There’s a limit – either £8,000, or 10 times the amount you receive in Gift Aid donations, whichever is lower, but for some charities, this might be just right.

Giving Gift Aid as owner of an LTD company

Any donations made by a limited company to a registered charity or CAC are not actually within gift a relief so a limited company may receive corporation tax relief instead currently at 90% on the charitable donations it makes as a deduction from its profits.

Gift Aid if you don’t earn enough to pay income tax

Gift Aid can only be reclaimed on donations made by individuals who pay UK income tax or capital gains tax at a rate at least equal to the amount claimed on their donations in the current tax year. If you wanted to Gift Aid a £100 donation so the charity of CAC got £125, then that means you are agreeing that you have paid at least £25 pounds in tax per year (as a basic rate taxpayer) or £50 (as a higher rate taxpayer). If your income is below the personal allowance, you will be personally liable for the top-up amount.

How does Gift Aid work for charities?

The onus is on the charity to register for gift aid and apply for the Gift Aid relief through a ‘Gift Aid Schedule.’ It’s well worth doing.

 Plus – it can be backdated for 4 years.

Getting started with Gift Aid as a charity

How does Gift Aid work for charities and how much will you get? This is all down to the records you keep – but the first step is to be recognised by HMRC when you register as a charity. The guidance is to register with the HMRC with a government gateway number, then enrol with Charities Online, a part of HMRC, and finally activate the Charities Online registration.  It’s a multi-step process and it does take some time.

To register the details of your charity. You will need:

·  Bank details and financial accounts

·  Officials’ details (including national insurance numbers)

·  Registration numbers (if you’ve registered with a regulator)

·  Charitable objectives / purposes

·  Government document / rulebook explaining how your charity is run

·  Government gateway ID and password

Once it is all setup, it’s time to make a claim, by post, via spreadsheets for up to 1000 donators and you have 4 years to do this. (HMRC announced the move towards online Gift Aid filing from 2013, which has made it far simpler than paper forms of past!)

It is critical to keep detailed records of all donations – not just for simple claims, but the fact that gift aid declarations need to be kept for a minimum of 6 years (plus the current year), or the money given can be taken back by HMRC. You also need to keep sponsor forms as well for sponsored events.

Wondering how does gift aid work for charities in the long term or with significant donation levels?

There are detailed guidelines online to help you understand the tax implications we recommend having a good read of.  Charities may wish to speak to the HMRC charities helplines on 0300 1231073.

Gift Aid how does it work for me?

Personal questions about the tax you’ve paid that are making your head spin?

For individuals with questions around tax, PAYE and Gift Aid, we recommend speaking to trained accountancy or tax professional, or a member of the HR team at your company.