HMRC is extending people's basic tax rate band through a legal loophole involving Gift Aid declarations. Once you’ve made a Gift Aid declaration, your basic and higher rate tax bands are extended by the gross charitable donation, thereby increasing the proportion of your income taxed at the lower rates.
How Gift Aid Extends Tax Bands
Charity Finance Group explains: “For example, if you’re a higher rate taxpayer (40%) and you donate £100 to charity, your basic rate band is extended by £125. The charity claims the 20% tax from HMRC as usual; however, you also benefit from the donation due to the fact that £125 of income that would have been taxed at 40% is now taxable at 20%. The result is that you receive additional tax relief of 20% by paying less higher rate tax to HMRC.”
Benefits for Additional Rate Taxpayers
Similarly, if you’re an additional rate taxpayer (45%), your income tax relief increases to 25%. The tax-free personal allowance (£12,570 for 2023/24) reduces by £1 for every £2 of income above £100,000. However, Gift Aid donations extend the £100,000 threshold, such that the personal allowance is restored by £1 for every £2 of gross Gift Aid donations. The combined effect of the extended basic rate band and the restored personal allowance gives an effective rate of tax relief of 60%.
Claiming Tax Relief
The easiest and quickest way to claim relief is to complete a Self-Assessment Tax Return and include details of any Gift Aid donations made during the year. Your donations will qualify as long as they’re not more than 4 times what you have paid in tax in that tax year (6 April to 5 April).
The tax could have been paid on your income or capital gains. You must tell the charities you support if you stop paying enough tax. You should only sign a Gift Aid declaration if you’ve paid enough tax to cover what the charity or CASC is going to reclaim. If the charity or CASC gets back more tax than you’ve paid, HMRC may ask you to pay more tax to cover the difference.
