From skydiving to shopping to monetary support, there are lots of ways to help your favourite charity. But do you know that claiming Gift Aid tax relief can reduce your tax bill?
This opportunity can be applied when completing your self assessment tax return. The re:accounts team is already very busy completing tax returns, helping you – and us – avoid the last-minute pressure of the 31 January submission deadline. We advise two ways to reduce your tax liability (very handy if you are creeping into a higher tax rate):
1. Contribute to a registered pension scheme where the scheme will treat the payment as made net of basic rate income tax.
and/or
2. Donate to a UK charity under Gift Aid.
However, while option one can apply, it’s unusual to know your total income before the end of the tax year, which often rules out the pension contribution route.
Conversely, it is possible to treat a charitable donation made now as if it had been made in 2023/24. This reduces the adjusted net income of 2023/24 by the amount of donation grossed up for basic rate tax. Importantly, it also expands the band for income that is taxable at basic rate by the same amount.
The tax saving would not equal the Gift Aid inclusive payment to the charity but it would provide a welcome reduction in the overall ‘cost’ to the donor.
Treating donations in this way can benefit capital gains tax as well as income tax amounts due. It might also be useful to a parent trying to preserve his or her eligibility for tax-free childcare by reducing their adjusted net income to £100,000.
Pitfalls to avoid
Treating a donation made in one tax year as if it were made in the previous tax year is entirely legal (Income Tax Act 2007). However, it is important to tread carefully to avoid pitfalls:
Annual gifts or ad hoc payments are problematic when applying this legislation. Monthly payments to charities are usually no problem.- Any donation to be considered needs to be identified as part of the original tax return. The benefit cannot be claimed by amending the tax return.
- The submission deadline remains in place. This means information for tax returns should be compiled in good time to include relevant donations.
It is possible to treat a charitable donation within the previous year if you do not usually submit a self assessment form. HMRC advises this can achieved in writing (over £5,000 involved) or by phone for donations of £5,000 or less.
‘We always aim to reduce our clients’ tax liability,’ says Felicity Rader, a tax expert at re:accounts Chartered Accountants in Stevenage. ‘Looking at charitable donations for potential savings is just one option we consider.’
Would you like to pay less tax? Let’s see how we can help. Contact the re:accounts team for an initial discussion without obligation. Saving tax is our superpower!
