Under the Gift Aid scheme, charities may reclaim basic-rate tax from monetary donations received from UK taxpayers. The current Gift Aid scheme was introduced in 2000 and it means that donations of whatever value fall within the scheme and qualify for tax relief.

Suppose a donor makes a charitable donation of £100. The charity will receive the donation of £100 and because the donation is deemed to have been paid under the deduction of basic-rate income tax, the charity can reclaim £25 from HMRC (being £100 /80 x 20).

The donor is treated as having made a grossed-up donation payment of £125 which can be deducted from his or her taxable income. If the donor is a basic-rate taxpayer there is no further tax relief due to the donor but if the donor is 40 per cent taxpayer, then additional tax relief of 20 per cent (being the difference between the current higher rate of income tax of 40 per cent and the current basic rate of tax of 20 per cent) can be claimed by the donor, not by the charity.

Donors taxable at 45 per cent will get relief on the difference between the basic rate and their highest rate on the gross gift. If a donor gives £100 cash, the gross gift is £125. The higher-rate relief on this is 25 per cent, or £31.25.

In real terms, therefore,it costs a 45 per cent donor £68.75 to make a gift worth £125 to the charity. Or more simply, it costs the donor £55 to make a gift worth £100 to charity.

If the gift is large enough to reduce taxable income to below the 45 per cent threshold some of the gift will attract relief at 25 per cent and some at 20 per cent.

Detailed guidance notes explaining the Gift Aid scheme are also available on HMRC’s website.

CTG’s Gift Aid Practical Issues working group meets on a quarterly basis to discuss practical Gift Aid issues and share best practice – find out more here.