Gift aid donations 4 / 6

There are 3 tax benefits available for making personal gift aid donations:

Let's say that an individual makes a gift aid donation of £1,000

  1. Pay net of 20%. 

    For example, if an individual want to make a gift aid donation of £1,000, he needs to pay 80% and HMRC will make the remaining 20% donation on his behalf. 

    Therefore, he will pay £800 and HMRC will pay £200 to the fund.

  2. Increase the basic and higher rate bands by the gross gift aid donation. 

    Therefore, this same individual will increase his basic rate band to 37,700 + 1,000 = £38,700 and his higher rate band to 125,140 + 1,000 = £126,140.

    This will result in an additional £1,000 being taxed at the lower rate of 20% instead of 40%, and an additional £1,000 being taxed at the higher rate of 40%, instead of 45%.

  3. Gross gift aid donation are deducted from net income to arrive at adjusted net income. 

    Adjusted net income is used to determine the amount of personal allowance available. (Topic: Personal allowance)

Illustration:

Eli has a trading profit of £60,000 and he paid £2,400 to charity under the gift aid system.

  • Show the tax benefits of this donation.

    Calculate Eli’s income tax liability.

Solution:

Benefit 1:

  • Eli paid £2,400 (80%)

    HMRC paid £600 (20%)

Benefit 2:

  • Basic band extension: £37,700 + £3,000 = £40,700

    Higher band extension: £125,140 + £3,000 = £128,140

Benefit 3:

Adjusted net income = £60,000 - £3,000 = £57,000

Income tax liability
Total income£60,000
Personal allowance£(12,570)
Taxable income£47,430
£40,700 * 20% = £8,140
(£47,430 - £40,700) = £6,730 * 40% = £2,692
Total income tax liability£10,832

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