Gift Aid for Higher Rate Taxpayer

yorkie45_2

Can anyone explain how HMRC calculates gift aid tax relief as I am struggling to understand my tax code calculation. The actual charitable payments totalled £1068 and HMRC has calculated a tax free amount of £684. I understand that the charity claims an extra 25% as if I was a basic rate taxpayer and the tax calculation accounts for the difference between what the charity can claim back and the tax I actually paid since I am a higher rate payer. I just can't see how they get to £684. (I'm also based in Scotland so that might affect the calculation)

Dazed_and_C0nfused

Do you mean £1068 net or gross?

[Deleted User]

It looks like £1068 net. That would be £1335 gross. The op would have £1335 taxed at 20% as opposed to 41% saving £280.35.

To achieve this saving the code needs to be increased by £684. For the op an additional £684 would be free of tax. 41% of £684 is £280.44.

All sounds pretty close.

yorkie45_2

Thanks for attempting to explain but I'm still confused! 

 The £1068 was the net amount of cash given to charity so surely this means that I would have earned a gross amount of £1810.17 before being taxed at 41%? The charity claims back an additional 25% on the donation, that is £267, as if I was a basic rate taxpayer but there is still an amount of £475.17 tax which was paid (1810.17 - 1068 - 267)

Really appreciate any further help you can give as I feel this should be simple to understand but just can see it!

Dazed_and_C0nfused

yorkie45_2 said:

Thanks for attempting to explain but I'm still confused! 

 The £1068 was the net amount of cash given to charity so surely this means that I would have earned a gross amount of £1810.17 before being taxed at 41%? The charity claims back an additional 25% on the donation, that is £267, as if I was a basic rate taxpayer but there is still an amount of £475.17 tax which was paid (1810.17 - 1068 - 267)

Really appreciate any further help you can give as I feel this should be simple to understand but just can see it!

You're overcomplicating it.

Think of it as two elements.

There's what happens between an individual and the charity.  This is the same for everyone otherwise it would be incredibly complicated for the charity to monitor/police.

You donate £1,068 net of basic rate tax relief.  Which is £1,335 gross and the charity can claim £267 from HMRC.  That's the first element.

Then for you personally it means your basic rate tax band is increased by the gross contribution of £1,335.  As a Scottish higher rate taxpayer, presumably paying higher rate tax on at least £1,335, this means you pay 20% tax not 41% tax on an extra £1,335.  

This saves you £280 in personal income tax.

HMRC provisionally give this £280 to you by increasing your tax code allowances by £684.  This means your employer/pension payer doesn't deduct tax from an extra £684 of your income by virtue of the increased tax code.  £684 x 41% = £280.

So the charity ends up with £1,335 and that's only actually cost you £788.

£1,810 is never a feature of what's happened, the starting point is your (net) donation.

cmgurney

Dazed_and_C0nfused said:

yorkie45_2 said:

Thanks for attempting to explain but I'm still confused! 

 The £1068 was the net amount of cash given to charity so surely this means that I would have earned a gross amount of £1810.17 before being taxed at 41%? The charity claims back an additional 25% on the donation, that is £267, as if I was a basic rate taxpayer but there is still an amount of £475.17 tax which was paid (1810.17 - 1068 - 267)

Really appreciate any further help you can give as I feel this should be simple to understand but just can see it!

You're overcomplicating it.

Think of it as two elements.

There's what happens between an individual and the charity.  This is the same for everyone otherwise it would be incredibly complicated for the charity to monitor/police.

You donate £1,068 net of basic rate tax relief.  Which is £1,335 gross and the charity can claim £267 from HMRC.  That's the first element.

Then for you personally it means your basic rate tax band is increased by the gross contribution of £1,335.  As a Scottish higher rate taxpayer, presumably paying higher rate tax on at least £1,335, this means you pay 20% tax not 41% tax on an extra £1,335.  

This saves you £280 in personal income tax.

HMRC provisionally give this £280 to you by increasing your tax code allowances by £684.  This means your employer/pension payer doesn't deduct tax from an extra £684 of your income by virtue of the increased tax code.  £684 x 41% = £280.

So the charity ends up with £1,335 and that's only actually cost you £788.

£1,810 is never a feature of what's happened, the starting point is your (net) donation.

Thank you. This is a far better explanation of how tax on Gift Aid is recovered through tax coding than the one I've just been given by HMRC themselves! I should have come to MSE forums first.

saajan_12

Ahh so you're saying the reason the £1810 is irrelevant is because the donor never gave that to the charity, so that whole amount shouldn't be tax free. The amount the charity got in the end was £1335. The tax on that is £547 @ 41%, which is saved, by £267 going to the charity and £280 coming back to the donor via the tax return. 

Dazed_and_C0nfused

saajan_12 said:

Ahh so you're saying the reason the £1810 is irrelevant is because the donor never gave that to the charity, so that whole amount shouldn't be tax free. The amount the charity got in the end was £1335. The tax on that is £547 @ 41%, which is saved, by £267 going to the charity and £280 coming back to the donor via the tax return. 

If a tax return is completed and no provisional relief has been received via a tax code then yes, the full amount of the additional benefit in paying less higher rate tax will be seen in the Self Assessment calculation.