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Note: this post is only likely to be relevant to those under the jurisdiction of HM Revenue & Customs here in the UK.

Charities in the UK can claim back tax at the basic rate on donations they receive from tax-payers subject to certain conditions (signed declaration etc.) In the last few years, the basic rate of tax has been 22%. This means that for each 78p donated, the charity can make a claim for 22p from the government.

From 6 April 2008 onwards, the basic rate of tax has reduced from 22% to 20%, thus people are paying less tax within this band than they were previously. This means however, that for each 78p donated though, the charity can only reclaim 19.5p.

Because of the change, and to ensure that charities are not put into difficulty by this, there is a transitional relief scheme which allows charities to claim the difference between the 19.5p and the 22p until 5 April 2011 (3 years).

The charities do not need to claim this, but it will be done automatically as part of their gift-aid claim.

Worked example:

Before 05 April 2008: donor decided to give 10% of their gross income to charity, since they earned £20k per year, and the basic rate was 22%, they gave 10% x £20k x 78% = £1,560, knowing the charity could reclaim the £440 pounds which meant they donated 10% of their £20k salary (£2k).

After 06 April 2008: donor continues to donate £1,560 not realising that the tax rates have changed and the charity can reclaim £1,560 / 0.80 = £1,950, which means that the donor is no longer donating 10% of their income as they intended. Fortunately, the charity also receives gift-aid transitional relief automatically until the 2010/11 tax year and the charity receives the extra £50.

Special note: because the tax payer is now paying tax at 20% rather than 22% they might actually be making a saving overall. The amount of saving depends on their salary because there is no longer a 10% lower tax rate.

Someone earning £20k will be £69.90 better off and someone earning £35k would be £369.90 better off. Whereas some earning £11,482 (national minimum wage for over 22 working full time for 40 hours per week) would be £100.46 worse off and once the transitional relief ends this person would need to increase their gift to maintain a 10% gross salary donation without any reduction overall in tax.

(Perhaps now we can see why people are questioning Gordon Brown’s poverty-fighting credentials when the tax changes he has introduced only help those on middle-incomes and make things harder for those on lower incomes).

Summary:

Charities including churches need to move towards educating their members who give regularly to realise that come April 2011 they will need to have increased their donations to at least maintain the level of their donations, though not all will receive the benefit of the corresponding lowering of the basic tax rate.


Inland Revenue page on gift-aid transitional relief

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