Author:
Jack Munday
Chartered Financial Planner,
Saltus Asset Management Team
Reviewed by: Megan Jenkins, Chartered Financial Planner, Saltus Asset Management Team
In the world of philanthropy (and tax…) every penny counts. That’s why Gift Aid can be a smart choice for higher-rate or additional-rate taxpayers keen on supporting a charity or community amateur sports clubs (CASCs) whilst benefiting from tax savings.
What is Gift Aid?
Gift Aid is a government initiative designed to maximise the impact of donations to UK charities by allowing them to claim back the basic-rate tax on donations made by UK taxpayers.[1] Sound confusing? Let us break it down. For every £1 you donate, the charity can claim an extra 25p, making your contribution go further—all at no additional cost to you. Sounds like a win-win situation…
However, there’s one condition: you must have paid enough Income Tax or Capital Gains Tax in the same tax year to cover the amount being reclaimed by the charity. If not, you may be required to pay back the difference to HMRC, so it’s important to incorporate this into your financial planning.
It’s also worth noting that there is a limit to the value of donations that are eligible for Gift Aid. Your donations only qualify as long as they’re not more than four times what you have paid in tax that year.[2]
Gift Aid and financial planning: How they work together
For higher-rate (40%) and additional-rate (45%) taxpayers, Gift Aid offers more than just a way to support charity—it can be a valuable tool in tax planning.[3] Whilst basic-rate taxpayers benefit from knowing their donations are boosted by the scheme, higher and additional-rate taxpayers can reduce their own tax liabilities by claiming the difference between their rate and the basic rate of tax.
Basically, if you’re already gifting, make sure you’re claiming! If you’re not already gifting… maybe this benefit might make you reconsider?
Here’s how it works: when you donate under Gift Aid, the charity reclaims 20% tax (the basic rate). But if you’re taxed at 40% or 45%, you can reclaim the difference on the grossed-up donation amount. For example, if you donate £100, the charity claims an extra £25, making the total they receive £125. As a higher-rate taxpayer, you could claim back £25, while an additional-rate taxpayer could claim £31.25.[4]
So what? Well, this could potentially drop you into a lower tax bracket. This is particularly useful if your income is close to certain thresholds, such as £100,000— (Earning over 100k? How to avoid the 60% tax trap | Saltus) where exceeding the threshold results in a gradual loss of the personal allowance—or £60,000, at which point the High Income Child Benefit Charge may apply.[5]
Incorporating Gift Aid into your broader financial plan
Gift Aid can be an underutilised yet valuable part of a comprehensive financial plan, particularly if you’re a higher-rate or additional-rate taxpayer looking to optimise their tax position. Donations made through Gift Aid can help reduce your overall tax burden, support charities or CASCs, and potentially lower future liabilities such as Inheritance Tax.
For individuals with fluctuating income levels or self-employed professionals, Gift Aid can offer a way to manage tax liabilities in any given year. If you find yourself facing a higher-than-expected tax bill, making a charitable donation could help reduce it.
Additionally, for those thinking ahead to estate planning, regular charitable donations can help reduce the size of a taxable estate.[6] By making contributions through Gift Aid, you not only increase the value of your donations to the charity but also potentially reduce future inheritance tax liabilities.
And remember, you must always tell the charities you support if you stop paying enough tax for your donations to be eligible for Gift Aid!
A smart strategy for charitable giving and tax efficiency
Gift Aid is more than just a way to support good causes… it’s a useful tool for managing your personal finances and optimising your tax position. At the end of the day, incorporating charitable giving into your financial plan has a number of benefits for you and the charities or CASCs you support—so why not use it?
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All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.