Gift aid is tax relief on money donated to UK charities.

Gift Aid works by allowing charities to take a donation, and then reclaim tax on its 'gross' equivalent (its value before tax was deducted) at the basic rate. This is 20 per cent from 6 April 2008.

In practice this means that for every pound donated to charity using Gift Aid the charity can claim an additional 25 pence from HMRC. In addition HMRC will automatically pay the charity a further 3 pence for every pound Gift Aid donation it receives between 6 April 2008 and 5 April 2011; this transitional relief has been provided by Government to allow charities to adjust to the fall in basic rate tax (from 22% to 20%) from 6 April 2008. This means that for every pound donated under the Gift Aid scheme the charity will continue to receive 28 pence.

Gift Aid can apply to one-off donations or to a series of regular donations.

Gift Aid declarations

In order for a donation to qualify under Gift Aid the donor needs to make a declaration saying that they would like to donate through the Gift Aid scheme and confirming that they have paid enough tax to cover the charities claim. The charity can ask for a written declaration or they may accept oral declarations.

A Gift Aid declaration can apply to:

• a single donation
• all future donations to the same charity
• donations made to the charity in the previous six years or
• a combination of these options.

The charity will ask which type of declaration the donor wants to make.

Who can donate through Gift Aid?

A donor can use Gift Aid if the amount of tax they have paid in the tax year of the donation is sufficient to cover the amount of tax the charity will reclaim against the donation. The tax paid by the donor may be Income Tax, Capital Gains Tax or tax credits on UK company dividends. Tax years start on 6 April and run until 5 April the following year.

Higher rate taxpayers

A higher rate taxpayer who makes donations through Gift Aid can claim back the difference between the higher rate of tax at 40 per cent and the basic rate of tax at 20 per cent on the total value to the charity/CASC of their donation (the 'gross donation').

The donor may choose to give some or all of this difference to charity. Donors who complete a Self Assessment tax return will have an option to claim back the higher rate element of the tax relief on any donations made to charity. Donors who do not complete a Self Assessment tax return can call their tax office and have the higher rate relief reflected in their PAYE tax code.