Gift Aid warning: ‘giving to charity landed me with a surprise tax bill’

If you're dusting off a festive sweater to take part in Save The Children's annual Christmas Jumper Day today (Thursday 7 December), be careful your donation to the cause isn't rewarded with an unexpected tax bill.

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. But if you haven't paid enough tax during the year to cover the 20% the charity will reclaim from HMRC, then you will need to pay the levy yourself.

With many people keen to give to charity during the festive period, Which? takes a look at the rules around making donations and the most tax-efficient ways to do it.

What is Gift Aid?

When you donate to charity the money is net of tax. Opting into the Gift Aid scheme permits the charity to reclaim the 20% basic rate tax from HMRC.

Say you pay £100 to charity. You'd have to earn £125 gross pay to have £100 in your pocket after tax. So when you make your donation, the charity can claim back the 20% tax, and receive an extra £25.

• Find out more: tax relief on charitable donations

‘Giving to charity landed me with a surprise tax bill’

Keith Bushnell took early retirement three years ago and has been living off savings ever since. With no earnings from employment or pensions, the 62-year-old from Coventry shouldn't need to pay any income tax at all. So he was surprised when he received a letter from HMRC last autumn telling him he owed around £60 in 'other income' for the 2021-22 financial year.

After doing some homework, he discovered the source of this mystery bill. Bushnell makes monthly charitable contributions adding up to a couple of hundred pounds a year, all through the government's Gift Aid scheme. But because he isn't paying any income tax or capital gains tax, HMRC required him to pay the amount claimed back by the charity.

He coughed up the money and asked all the charities he gave to regularly to stop Gift Aid on any future donations. But it wasn't the end of the story.

'All the charities I spoke to agreed to stop Gift Aid on my donations and I thought that was it. But in October, I received a tax bill again, for a similar amount,' he explains. 

'I went back to the charities and they said you have to inform HMRC as well. So I called the tax office helpline to explain and the charge was wiped out. Then within a few weeks, I had an updated assessment, confirming that I had zero tax to pay.'

Bushnell says while a simple phone call to HMRC will suffice (they didn't ask him for any written notification or proof), the simplest way for a low to zero taxpayer to avoid a bill is to not tick the Gift Aid box in the first place.

What does HMRC say?

When Which? asked HMRC about Bushnell's case, a spokesperson suggested that the fault lies with the charities, not the tax office.

It told us that if the customer has informed the charity that their donations aren’t eligible for Gift Aid, but the charity continues to submit claims on the basis that they are, the individual should contact the charity directly to rectify their records.

• Find out more: tax-free income and allowances

Higher earners can claim Gift Aid tax relief 

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 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. So, higher-rate taxpayers could reclaim an extra 20%, and additional-rate taxpayers an extra 25%. 

For example, let's say you donate £100 to charity and register for Gift Aid. The charity gets your £100 plus £25 Gift Aid. 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.

• Find out more: capital gains tax allowances and rates

How to make a claim 

The easiest way to make a claim for 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.

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Most tax-efficient ways to give this Christmas

Gift Aid isn't the only way to help your favourite causes. Here are some other tax-efficient methods:

Give through your salary

Donations in your pay are taken from your salary before tax is deducted. This means your donation costs you less.

The amount of tax relief you get depends on the rate of tax you pay. For more details, see the government guidance on payroll giving.

• Find out more: how tax relief works

Using your will to donate

A gift 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 beneficiaries overall.

However, this depends on how much your estate is worth in the first place, as well as the size of your donation. Always seek advice before gifting to charity to avoid inheritance tax.

• Find out more: what to consider when leaving a gift to charity in your will

Donating 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.

• Find out more: charity scams: are you donating to a scammer?