Giving to charity
Other tax issues
Here we describe the two main ways that individuals can get tax relief for cash donations made to charities – relief available under payroll deduction schemes (Give As You Earn or payroll giving) and Gift Aid.
What is payroll giving?
If you pay tax through Pay As You Earn (PAYE), payroll giving is a simple way of making regular gifts to charity. You get your employer or pension payer to make the donation from your pay or pension.
How does payroll giving work and how much tax can I save?
Your employer or pension payer takes off the payments before working out and deducting your tax, so you get tax relief on your donation immediately. The relief is worked out at your highest rate of tax.
For example, if you pay tax at the basic rate of 20%, and give £10 a month, you save £2 a month tax (20% of £10). The actual cost of the donation to you is only £8. You will however, pay National Insurance contributions (NIC) as normal on the £10.
Let’s imagine that your wages are like water in a jug. Your employer takes the full jug and works out how much NIC you have to pay.
Then they tip a bit of the water out into a glass and give that to the charity to help top up the charity’s water tank.
Your employer then calculates how much tax you pay on what is left.
Giving to charity 301 by LITRG
If you do not earn enough money to pay tax, you will not get tax relief on your donation.
Your employer or pension payer passes your donation to the charity through HM Revenue & Customs (HMRC) approved charity agencies.
Payroll giving does not affect any other donations you might want to make to charity. You can, for example, make other donations using Gift Aid if you wish.
Who can use payroll giving?
You can use payroll giving as long as both of the following apply:
- you are an employee or you get a company or personal pension and your employer or pension payer deducts tax through the PAYE system; and
- your employer or pension payer operates a payroll giving scheme. You will have to check this with them.
Donations made under payroll giving do not reduce your pay for national minimum wage purposes. This means you may make donations under payroll giving even if you are earning at the national minimum wage (or national living wage, if appropriate).
Does my employer know which charities I’m giving to?
You do not have to tell your employer or pension payer which charities you support.
The payroll giving agency running the scheme provides you with a charity nomination form, which you complete and return directly to the agency to tell them where to send your donations.
Once a gift has been deducted from your pay or pension, no refund is possible. Some charity agencies may charge a small fee, which is deducted from your donation, to cover administrative costs.
Do I have to tell HMRC about my payroll giving?
You do not need to put details of gifts made through payroll giving on your Self Assessment tax return if you complete one or tell HMRC about the donations in any other way at all.
This is because you will already have received the correct amount of tax relief on your donation and there is nothing else to do.
You might, however, want to keep records for yourself.
What is Gift Aid?
Gift Aid is another tax efficient way of making gifts or donations to a certain charities or sports clubs.
Whatever you give, the charity can claim back from HMRC the basic rate tax you have paid on the amount of the gift.
So, effectively, the government tops up your gift. This is called ‘tax relief’ – we explain more below.
What charities and sports clubs does Gift Aid apply to?
Gift Aid can apply to UK registered charities.
When the UK was a member of the European Union, relief was also available on donations to charities registered in EU member states, Norway, Liechtenstein and Iceland. We understand that that this continues to be the case for donations made from 1 January 2021, but we are awaiting confirmation from HMRC on this point.
Gift Aid also applies to gifts made to Community Amateur Sports Clubs (CASC). The relief only applies to gifts made to the CASC and not to any other payments such as membership subscriptions.
What are the benefits of Gift Aid?
For basic rate (20%) taxpayers – which covers most people in the UK – the benefit of Gift Aid is to the charity rather than to you. But if you feel passionately about supporting a charity, you will of course be pleased that the charity gets a bit extra on top of what you can afford to give.
If you pay tax at more than the basic rate, you can get some extra tax relief too. You will have to claim it from HMRC.
Watch out, though: if you do not pay any income tax or capital gains tax, you should not make donations under Gift Aid. We explain this below.
How is Gift Aid tax relief worked out?
When you make a Gift Aid donation, you use money that has already been taxed. If, like most taxpayers in the UK, you are a 20% taxpayer, you will have made your donation out of income that has already suffered 20% tax.
The charity will take your donation and then reclaim from HMRC the 20% tax that you originally paid.
If you are a 20% taxpayer, this gives the correct tax relief straight away.
Example: basic rate taxpayer
You earn £12.50 and £2.50 is deducted from this at the basic rate of 20%. This leaves you with £10. If you give this £10 to a charity using Gift Aid, the £2.50 tax you paid on it will be paid to the charity by HMRC, so the total received by the charity is £12.50.
If you pay tax at the rate of 40% or more (or, for Scottish taxpayers, 21% or more), you can claim back extra tax from HMRC. This will be the difference between the higher tax you have paid and the 20% tax already claimed by the charity.
Example: higher rate taxpayer
You donate £100 to charity – they claim 20% to make your donation £125. You pay 40% tax so you can personally claim the other £25 from HMRC.
This is done by HMRC increasing your basic rate band by the amount of the donations. (The basic rate band is the amount of income which is charged to tax at the basic rate – £37,700 in 2021/22.)
How do I tell the charity to claim Gift Aid?
The process is very simple. The charity will ask you to complete a form which includes a Gift Aid ‘declaration’.
This form requires:
- your name, address (including postcode),
- your signature (or tick a box, if online),
- the date,
- you to confirm that you are a UK taxpayer, and
- you to confirm that any donations you make to the charity or CASC in future (or in the previous four years) are to be treated as Gift-Aided.
If you have not paid enough UK tax (income tax or capital gains tax) during the tax year in question to match the tax the charity will reclaim on the gift, you should not make donations under Gift Aid. We explain this further below.
How do I claim extra tax relief on Gift Aid payments?
You are only eligible to claim additional tax relief personally if you pay tax at a rate higher than 20%.
If you normally complete a Self Assessment tax return, tell HMRC about your gifts to charity – and claim any tax relief – by completing the appropriate section on your tax return.
If you do not complete a tax return, you can give the details on form P810 Tax Review – this is not available online and is only available by contacting HMRC.
If you pay tax at a rate higher than 20% through PAYE, HMRC can give you any tax relief through your tax code. This means any refund will be paid when your wages or pension is paid to you. In other words, your employer or pension provider will take less tax off your wages or pension.
If not, you may have to obtain a refund directly from HMRC.
It is therefore important to keep records of all your donations made under Gift Aid.
Note: claiming the tax relief yourself should be straightforward. Some businesses target taxpayers who have tax relief to reclaim on their Gift Aid donations. Their service may be to write a letter to HMRC on your behalf telling them about your circumstances and donations – for a fee. You can avoid incurring fees unnecessarily by doing this yourself, unless you have other complications with your tax affairs and need to seek advice.
How does Gift Aid work if I am a Scottish taxpayer?
For 2021/22, Scotland has rates of tax of 19%, 20%, 21%, 41% and 46%.
Those paying 19% are treated in the same way as 20% taxpayers – but may need to take extra care that they have paid enough tax to cover the Gift Aid claim.
Can I use Gift Aid if I don't pay any (or not much) tax?
To use Gift Aid, you must have paid enough income tax or capital gains tax to HMRC in the tax year in which you make your donation – at least equal to the amount that the charity will reclaim. The charity will ask you to sign a Gift Aid declaration confirming that you pay enough tax.
If you have not paid enough tax but make a Gift Aid donation, you may have to make up the difference in income tax to HMRC. Sometimes HMRC will ask the charity to repay, or not claim, the tax not covered, but there is no guarantee that this will happen.
You do not have to be working to be paying tax. Apart from tax on income from a job or self-employment, you might pay tax on your pension or investments, such as rental income. Other taxes such as VAT and council tax do not qualify. Certain income tax charges are also excluded, such as income tax paid on a deferred state pension lump sum.
To work out if you have paid enough tax to cover your donations, divide the donation value by four and compare this figure to the amount of tax that you have paid for the year.
Remember to add all the Gift Aid donations you have made in the tax year and that any tax at source is only an estimate and so may not be the final amount due to HMRC – you may be due a refund or have a balance to pay. See How do I work out my tax? for more information.
Due to the personal savings allowance and the dividend allowance, note that most people do not need to pay tax on their savings interest or dividends. Both dividends and bank interest are paid gross (no tax is deducted before you get them).
What happens to Gift Aid donations if my income goes down?
Where you donate to charity under a continuing Gift Aid declaration, the charity will continue to assume the donation has come from someone paying tax. You might then be faced with a bill from HMRC for the amount the charity has claimed. Therefore, each year, check your tax paid against the tax reclaimable by charities on your Gift Aid donations.
If your tax liability reduces so that it is not enough to cover your Gift Aid donations, you may wish to cancel your Gift Aid declaration. You can still donate to charity, but the charity cannot claim Gift Aid relief from HMRC. You should also bear this in mind when visiting attractions which invite you to Gift Aid your entry ticket.
Mr Green has to repay tax on Gift Aid donations last tax year, Mr Green was working earning £27,000 a year. He then retired and his total pension income is now below the income tax personal allowance, so he is a non-taxpayer.
He has donated £10 a month to the RSPCA for many years. This monthly donation equals £120 a year. As he has signed a Gift Aid declaration, the charity reclaims £30 a year from HMRC.
Now that he has retired, there is no tax to pay on his income. However, as the Gift Aid declaration is still in place, the charity still reclaims £30 from HMRC.
Mr Green owes the shortfall of £30 a year to HMRC now he has retired. Mr Green should tell the charity that he wants to cancel his Gift Aid declaration.
Are there any other Gift Aid rules?
Gift Aid donations must be genuine.
This means that the gift must be your money – you cannot, for example, collect donations from others and claim Gift Aid on the donation yourself.
Leanne’s father sadly dies. Instead of flowers at his funeral, Leanne collects cash donations from her late father’s friends and other family members totalling £300.
These are to be paid to his favourite charity.
Leanne can only claim Gift Aid on any amount she donates to that charity out of her own money. The £300 she has collected from others should not be paid under Gift Aid in her own name.
To get more money to the charity, Leanne might instead have asked mourners to make their donations direct to the charity under Gift Aid (assuming they are taxpayers).
Gift Aid donations must also be made voluntarily, and you cannot get anything (or not anything much) back in return for your donation.
If you do get anything back from making a gift, it should not be worth more than the limits shown below (unless it is a benefit that is not counted).
Maximum value of benefit
Gifts up to £100
25% of the donation
£25 plus 5% of the value exceeding £100 (overall maximum benefit is capped at £2,500)
Let’s look at a simple example.
Rhiann gives £50 to a nature charity under Gift Aid. In return, the charity sends her a free badge. The Gift Aid claim is fine, assuming the badge is not valuable.Voluntary Gift Aid donations 301 by LITRG
Gift Aid cannot be claimed if the amount given is essentially a payment for goods or services, for example an entrance ticket for an event (but you can claim Gift Aid if you agree to pay extra for your entry to an attraction – see below), goods bought in a jumble sale, etc.
When else can I claim Gift Aid?
You might be able to claim Gift Aid in other situations, for example:
- if you go to a visitor attraction, such as a museum, zoo or heritage property, you may be asked if you are willing to pay a little more (normally 10%) for your entry ticket so that the charity may claim Gift Aid;
- if you sponsor someone to take part in a charity event, you may be asked if the charity can claim Gift Aid on your sponsorship;
- if you donate goods, some charities run a scheme under which the amount they raise from selling your items can be treated as a Gift Aid donation.
In each of those cases the rule about paying enough tax still applies – only give under Gift Aid if you are certain to pay enough income tax or capital gains tax in the tax year to cover the amount of tax reclaimable on all your Gift-Aided donations. You can claim tax relief on these donations in the same way as if you had simply made a cash gift.
Will Gift Aid donations affect my tax in any other ways?
Yes. Gift Aid donations are taken into account when working out what your 'adjusted net income' is for tax purposes. This means that the amount you gave to the charity is added to the tax relief the charity reclaim and this total amount is taken off your taxable income. This lower adjusted net income figure can reduce the amount of tax you pay, because it is used to work out, for example:
- the amount of any Personal Savings Allowance you get
- whether your personal allowance has to be reduced, where income is above £100,000 a year
- how much high income child benefit charge you have to pay
- how much married couple's allowance you can get
Gift Aid donations can also affect the amount of capital gains tax you pay, if you have a gain which is taxed at a mixture of rates. Because the gross Gift Aid contributions extend your basic rate band, the amount of the gain charged at the lower rate would be increased by the same amount.
Can I carry back Gift Aid donations?
In some cases, Gift Aid donations can be carried back and treated as if they were made in the previous tax year.
This can be helpful where you were a higher rate taxpayer in the previous tax year but are now a basic rate taxpayer. Alternatively, you may wish to carry back a donation if you did not pay enough tax in the current tax year but you did in the previous year.
If you carry back a donation, you must carry back the whole amount of it.
When you are completing your Self Assessment tax return for a year, you can only elect to carry back contributions to that year, and not from it. The election must be made in your original tax return for the year to which you are carrying back the contributions, and before the normal Self Assessment filing date for that year.
This means, for example, if you made Gift Aid contributions in 2020/21 and you realise when completing your 2020/21 tax return that you did not have sufficient taxable income to avoid a Gift Aid tax charge, unfortunately you cannot now carry back these contributions to 2019/20.
Similarly, payments made on or after 6 April 2021 can only be included in your Self Assessment tax return for the year ended 5 April 2021 on an original 2020/21 return which is sent to reach HMRC before 31 January 2022.
If you have made a Gift Aid carry-back claim in a tax return for a year, then when you are completing your tax return in the following year (that is, the year in which the contributions were actually made), you should report the amount of the contributions made in the year which you have previously elected to carry back. For example, the contributions made in 2020/21 which were carried back to 2019/20 on your 2019/20 tax return should be reported in box 7 of page TR4 of your 2020/21 return (or the equivalent box in the online system).
Mr Purple claiming to carry back a Gift Aid donation Mr Purple was a higher rate taxpayer in 2020/21. In 2021/22 he decides to cut back his work to spend more time with his grandchildren, so will only be a basic-rate taxpayer.
On 15 June 2021 (in the 2021/22 tax year), Mr Purple gives £100 to Unicef. They will claim 20% from the government to make his donation £125.
Mr Purple can put the £100 donation in his tax return for 2020/21 which is due by 31 January 2022. This will trigger a refund of £25 (the difference between the 20% tax relief given by the government and the 40% he is due because he was a 40% taxpayer in 2020/21).
If Mr Purple submits his tax return for 2020/21 by the 31 January 2022 deadline, but only remembers about the 15 June 2021 payment to Unicef after the deadline, he cannot submit an amended return to trigger the refund. Similarly, no carry back claims can be made in respect of any other donations made in the 2021/22 tax year but after 31 January 2022.Gift Aid example Mr Purple 301 by LITRG
How does a Gift Aid donation affect my tax credits?
If you claim tax credits, you can deduct the gross value of any Gift Aid donation from your income when you declare it for the purposes of renewing your claim. This could have the effect of increasing your entitlement to tax credits.
So, if your annual income is (say) £20,000 and you make Gift Aid donations of £200 net, your income for tax credits will be £20,000 less £200 plus the tax thereon, that is £250, a total of £19,750.
How does Gift Aid affect my universal credit?
If you are employed and you make charitable donations under a payroll giving scheme, then the amounts withheld from you can be deducted from your employed earnings for universal credit purposes. The amount of earnings reported by your employer to the Department for Work and Pensions should be after the donations have been taken off, in which case there is nothing for you to do.
Otherwise, unlike for tax credits, Gift Aid contributions are ignored for universal credit purposes.
Where can I find more information on giving to charity?
There is more information on payroll giving and Gift Aid on GOV.UK.
You may also find HMRC’s helpsheet 342 Charitable giving useful.