How to earn more at the basic rate of tax

Donations made to charity over the course of a tax year can add up and taxpayers should ensure that they keep a proper record of all donations and note them on their tax return. The Gift Aid scheme is available to all UK taxpayers. The recipient charity can claim an extra 25p worth of tax relief on every pound donated provided all the qualifying conditions of the scheme are met.

If you pay Income Tax at the basic rate, then no additional relief is due on your gifts. However, higher rate and additional rate taxpayers are eligible to claim relief on the difference between the basic rate and their highest rate of tax. This relief is given by increasing your basic rate and higher rate band by the grossed-up amount of your gifts.

For example, if a taxpayer donates £500 to charity, the total value of the donation to the charity is £625. The taxpayer can claim additional tax back of:

  • £125 if they pay tax at 40% (£625 × 20%)
  • £156.25 if they pay tax at 45% (£625 × 20%) plus (£625 × 5%)

There is no upper or lower monetary limit on the amount of a gift that can qualify for Gift Aid, provided that the taxpayer has paid enough tax to cover the amount that is payable to the charity or CASC.

Planning note

A higher rate or additional rate taxpayer who wanted to reduce their tax bill for the previous tax year, could decide to make a gift to charity in the current tax year (2018-19), and then elect to carry back the contribution to 2017-18. A request to carry back the donation, must be made before or at the same time as the 2017-18 self-assessment return is completed. The online filing deadline of 31 January 2019 means that there is still plenty of time left to consider the optimum method for making charitable donations.

It is also possible to make gifts of certain assets to charities and claim Income Tax relief on the value of these gifts. This may be more tax efficient for certain larger charitable donations.