Tax Back On Donations
If you have funds to spare, then donating to charity is a noble way of using those funds. For most people, supporting a worthy cause should be enough. However, if you have a high enough level of income to suffer from higher rates of tax, then your acts of largesse could actually benefit both you and your chosen good cause.
When you make a payment that qualifies for Gift Aid, the recipient charity is able to claim extra money from HMRC. The amount that they can claim is equivalent to the basic rate tax that an individual would have paid to leave them with the net amount they donated. The current basic rate of tax is 20%, so a donation of £80 is treated as if it was a donation of £100 with £20 tax deducted. The charity would then make a Gift Aid claim directly to HMRC to get that £20 back.
If the donor only pays basic rate tax then that is the end of the story. If they are a higher or additional rate taxpayer, then making donations eligible for Gift Aid can actually reduce their tax bill. This is because Gift Aid payments effectively increase the size of the basic rate band for the person making them. This has the knock-on effect of reducing the amount of their income that is subject to higher rates, reducing their tax bill by the difference between the two. Someone paying the higher rate of tax of 40% would get the same amount back for themself from HMRC as the charity is able to claim.
So, to our readers fortunate enough to have such high levels of income, I say this. Eschew that dodgy tax scheme that will just make people hate you and will probably prove ineffective later anyway. Make Gift Aid payments instead, and rest assured you are reducing your tax bill in a manner that is both legal and much more ethically pleasing.
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