Urgent warning over Gift Aid tick-box tax trap that could land you with a huge bill – how to avoid
EXPERTS are urgently warning low earners to avoid a little-known tax trap that could leave them with a big bill.
Giving to charity is an admirable move, but many generous Brits are probably unaware that they could be hit with a hefty tax bill for their kind deed.
When you donate money to a charity, or drop off old items at a charity shop, you’re usually asked if you want to proceed through something called Gift Aid.
Gift Aid is a government scheme which allows charities to claim tax relief on any donations they receive.
This means that all taxpayers can supercharge their donations, adding an extra 25p for every £1 they donate simply by ticking a box which confirms they pay tax.
Donating through the scheme doesn’t cost you a penny up front, as ticking the box just means that the charity can reclaim the tax on your donations.
But experts have now warned that gift-aiding could actually saddle low earners with an unexpected bill.
That’s because if you haven’t paid enough tax during the year to cover the 20% tax relief on anything you donate, the charity will reclaim from it HMRC – and then the taxman will demand it back from you.
To qualify for Gift Aid, you must pay an amount of UK Income and/or Capital Gains Tax that’s at least equal to the amount charities will reclaim on your donations each tax year, which run from April 6 to April 5.
If you end up paying less tax than the amount of Gift Aid claimed on all your donations in the tax year, it’s your responsibility to pay any difference to HM Revenue & Customs (HMRC).
Other taxes such as VAT and Council Tax do not qualify for Gift Aid.
Personal finance whizz Sarah Coles, from Hargreaves Lansdown, told The Sun: “Ticking the Gift Aid box is a brilliant way to help the charity get the maximum possible benefit from your donation, so the charity will get £125 for every £100 you give.
“But, it means you can run into problems if you haven’t paid enough tax in that particular tax year to cover your gift aid payments.
“In those cases, HMRC will pay the charity, and then issue a demand for the money from you.”
Sarah gave the example that if someone was earning £12,570 a year, and then drawing another £10,000 from ISAs, they wouldn’t pay any tax.
But if they then gave £1,000 to charity and ticked the gift aid box, the charity would claim £250 from HMRC.
But there would be no tax to offset it, so they would end up with a tax bill of £250.
Alternatively, if someone was earning £20,000, they would pay £1,486 in income tax during the year.
If they then gave £6,000 to the charity and ticked the Gift Aid box, the charity would claim back £1,500 from HMRC.
Because this is £14 more than the income tax paid, you’d get a tax bill for £14.
Plus Sarah pointed out – the tax trap doesn’t just include cash donations.
Many givers may not realise their donations to a charity shop could land them with a bill.
This is because the tax is taken when the items are sold, also known as the donations being “converted to cash”.
Sarah explained: “If you were to donate items to a charity shop and fill out a Gift Aid form for it, then the donations fetched more than you were expecting, you could end up with a tax bill.”
So make sure you think twice before ticking the Gift Aid box when you’re dropping off your old clothes at your local charity shop.
How does Gift Aid work?
WHEN you donate to charity you've probably seen the box that asks if you want to donate through Gift Aid.
Gift Aid is run through the government that sees charities and community amateur sports get a little extra when you donate.
Agreeing to Gift Aid when you donate means charities can reclaim 20% of the tax you have already paid on the money – an extra 25p for every £1 they receive.
It doesn’t cost you anything extra, as it would have been taxed anyway.
You need to make a Gift Aid declaration for the charity to claim. The charity or CASC will give you a form to sign.
They must also have an HMRC charity reference number – ask the charity or CASC if you’re not sure.
You must give a declaration to each charity you want to donate to through Gift Aid.
You can include all donations from the last 4 years. Tell the charity about any tax years where you did not pay enough tax.
How to avoid being caught out
Suppose your taxable income is close to the level of the personal allowance.
In that case, you should be thinking about whether you’ve paid enough tax to support your Gift Aid donations, using the example above or the HMRC income tax calculator as a guide.
If you pay PAYE tax, your payslip can give you an idea of how much tax you’re paying.
Bear in mind though that the tax on your payslip may not be the whole tax picture for the year and, if you are repaid some of it after the end of the year, this also needs to be taken into account in your Gift Aid calculation.
If you find that you haven’t paid enough tax, you should immediately notify the charities that you have supported.
They might be able and willing to adjust a future Gift Aid claim to repay any tax due on your behalf – but they aren’t obligated to do so in relation to donations already made, as it’s your responsibility as a donor to make up any shortfall.
You can however ask them to claim a lower level of Gift Aid on future donations to avoid it happening again.
If your cash was donated from a joint bank account with your spouse and your spouse has made a Gift Aid declaration and paid enough income or capital gains tax to cover the Gift Aid reclaimed, you could ask the charity to treat the gift as having come from your spouse instead.
How do I file a tax return?
TO file a self assessment tax retun, you'll need to register with HMRC first, which will then issue you with a Unique Taxpayer Reference (UTR).
You must register for self assessment by October 5 if you have to file a tax return and you have not sent one before.
You can do so by visiting www.gov.uk/register-for-self-assessment.
If you’ve previously registered and already have a UTR, you don’t need to go through this step again.
Once you’ve got your UTR, you can sign in via the “Self Assessment tax return” section of HMRC’s website by visiting www.gov.uk/log-in-file-self-assessment-tax-return.
You can then file your self assessment tax return online.
The deadline for sending a return online is January 31 every year.
If you need a paper copy of the main Self Assessment tax return, call HMRC on 03000 200 3610 and request an SA100 form.
The deadline for sending a return using a paper form is October 31 every year.
You need to pay the tax you owe by midnight on January 31 each year.
HMRC accepts your payment on the date you make it, not the date it reaches its account.
File late and HMRC will issue you with a fine.
PERKS FOR HIGH EARNERS
Gift Aid can be beneficial to you, as well as the charity if you have a higher income.
If you pay the higher-rate tax at 40% or the additional rate at 45% and have made Gift Aid declarations when giving to charity, you can claim back the difference between the basic tax rate and the rate you pay.
Currently, you pay the higher rate of tax if you earn between £50,270 to £125,140 – you pay the additional rate if you earn above this.
So, higher-rate taxpayers could reclaim an extra 20%, and additional-rate taxpayers an extra 25%.
Which? gives the example that say you donate £100 to charity and register for Gift Aid.
The charity gets your £100 plus £25 Gift Aid – and a higher-rate taxpayer can then reclaim 20% of £125, which is £25.
Or £31.20 if you’re an additional-rate taxpayer reclaiming 25%.
You just have to make sure that you do not donate any more than four times your income tax or capital gains tax amount for that tax year.
According to Which? the easiest way to claim Gift Aid donations is to do so through a self-assessment tax return.
It can be easy to forget how much you have given over a year, especially if you’ve made small ad-hoc donations, so go through your bank statements and emails carefully to check.
ALTERNATIVES TO GIFT AID
There are a few more tax-efficient ways you can donate to charity.
You can give to your favourite cause through your salary.
Donations in your pay are taken from your salary before tax is deducted – this means your donation costs you less.
Your employer needs to set up and run the scheme and the amount of tax relief you get depends on the rate of tax you pay.
You’ll still pay National Insurance contributions on the amount of your donation, but you will not pay any Income Tax on the amount you donate.
You might also consider donating through your will.
A donation to charity is free from inheritance tax (IHT), which is charged at 40% on any estate worth more than £325,000.
But if you leave 10% or more of your net estate to charity, you will benefit from a lower inheritance tax rate of 36%.
This means, in some scenarios, donating more to charity could lower your IHT bill, which could mean you have a bit more to leave to your kids or other beneficiaries overall.
Obviously, this depends on how much your estate is worth in the first place, as well as the size of your donation.
Always make sure to ask for advice before gifting to charity to avoid inheritance tax.
If you can, you might also consider donating through shares.
There’s no capital gains tax on the shares you donate. And you can claim tax relief on any costs linked to your donation, like brokers’ fees.
Again, the amount you can claim back depends on the rate of tax you pay.
To make a claim, mention your donation on your self-assessment tax form, or contact your local tax office.
Make sure you keep a dated copy of the transfer form and any documents relating to your donation.
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