The gift aid brain teaser

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    The gift aid brain teaser

    Most people are familiar with the concept of Gift Aid, as well as the sinking feeling when you get asked to fill out the Gift Aid form when dropping clothes off at a charity shop. In short, Gift Aid means that charities can claim an extra 25p from the government for every £1 you give. 

    Higher rate and additional rate taxpayers should take note as they are also able to claim back 20% or 25% of the donation respectively via a tax return. For an additional rate taxpayer, a gift of £100 to a charity would end up costing you just £68.75. If the charity claims Gift Aid, they can end up receiving £125 in total. 

    Sounds relatively simple, doesn’t it? 

    So, how do you gift £10,000 to charity?

    To illustrate the challenge, I’ll introduce you to Joe; a successful IT consultant earning over £150,000 a year making him an additional rate taxpayer. Joe is keen to share his wealth and decides he would like to give £10,000 to charity.

    Herein lies the brain teaser…

    Joe donates £10,000 to charity. The charity claims Gift Aid and receives a gross donation of £12,500.

    Through his Self Assessment tax return, Joe reclaims 25% of additional rate tax which amounts to £3,125. His net donation is now £6,875 and not the £10,000 he originally intended.

    What can Joe do?

    The Solution

    He could always gift this tax reclaim of £3,125 to charity but the cycle begins again – Joe donates £3,125 the charity receives £3,906 and he reclaims £977.

    As you can see from the table below, Joe is caught in an infinite loop of tax relief and tax rebates:

    Net DonationCharity receives (including gift aid)Tax reclaimed through Self-Assessment
    £10,000£12,500£3,125
    £3,125£3,906£977
    £977£1,221£305
    £305£381£95
    £95£119£30
    £30£37£9
    £9£12£3
    £3£4£1
    £1£1£0
    £14,545£18,181£4,545

    This continuous loop appears a drainer of both time and energy.

    A more efficient solution would be to make a larger one-off charitable donation of £14,545 (provided cashflow allows).

    The charity then claims Gift Aid of £3,636 and receives a total gross donation of £18,181 and Joe reclaims 25% of additional rate tax of £4,545, meaning the desired net donation of £10,000 has been made in the most efficient way possible.

    Next time you’re thinking of making a donation, take a few moments to consider the actual amount you want to give to charity after accounting for tax relief.

    Note: for gift aid, you can claim tax relief on donations you make in the current tax year. For more information, visit GOV.UK here.

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