As we do that last minute shopping and check our lists of presents many of us add the name of a favourite charity. December is a big month for charitable giving and it is more important than ever to make sure our gifts are given a boost by the Chancellor. So whether you give by cheque or online doing it in the right way is important.

Gift Aid is the name of the scheme that boosts our gifts with a bit extra from the Treasury. It works like this. If you are a taxpayer you have already paid tax on the money you give to charity. To give £100 you have to have earned £125 – or have £125 from your pension – so that after tax you end up with £100 left. That’s because basic rate tax is now 20% and 20% of £125 is £25 leaving you with £100 net.

If you make your gift to charity through Gift Aid the Chancellor will give back the tax you have already paid. So your £100 gift is boosted by another £25 from the Chancellor. And it gets better. When the basic rate of tax was cut from 22% to 20% in 2008/09 the Government agreed to maintain the same level of Gift Aid. With tax at 22% that was £28.21. So on top of the £25 tax you have actually paid the Treasury will still cough up the extra £3.21 as a ‘repayment supplement’. That will happen for three tax years up to April 2011.

Charities Aid Foundation, which helps charities boost their income, estimates that £700 million a year is lost because donors do not use Gift Aid when they could.

Taxpayers
Gift Aid only works for taxpayers. If you do not pay tax then you cannot use Gift Aid when you make a donation. If you Gift Aid a donation when you are not a taxpayer then the Revenue may ask you to return the money. In practice that is very unlikely to happen but if you do not pay tax then you should not tick that Gift Aid box on a donation form. If you make a regular donation under Gift Aid but then stop being a taxpayer – perhaps on retirement or when you reach 65 – make sure you let the charity know so it can stop reclaiming tax.

For taxpayers it is better if you make all gifts to charity through Gift Aid. The charity itself should make this easy for you. If you are making a straight donation then you just have to give your name and address and confirm you are a taxpayer. But there are complex rules about entry fees when you visit a museum or stately home that is a charity. You can only Gift Aid the entry fee if it gives you free entry for a year or you pay at least 10% more than the normal entry fee. Some places are now offering a Gift Aid entry as the main price and then say in small print you can enter for a non-Gift Aid price if you really want to. So the Gift Aid price might be £8.95 but the non-Gift Aid price would be £8.13. People who are not taxpayers should always opt for the non Gift Aid price.

Small casual gifts to charity are more of a problem. Gifts through sponsored events where you pay someone per mile run or per kilo of baked beans eaten can be paid through Gift Aid but only if the form is worded properly. There is a guide on the Revenue website. Many churches do now have Gift Aid envelopes available for visitors and the congregation. If you are a taxpayer you should always use them even for a small donation. But the tins that are being shaken this month on every High Street and shopping mall are simply not equipped to take your 50p as a Gift Aid donation. Of course, it is better to put the money in the tin rather than not give it at all. Though do make sure the person shaking it is a genuine representative of a real charity that you have heard of. But it is better still to wait until you get home and make a Gift Aid donation, even if it is just for a pound or two.

The same is true of the credit cards that let you give a small percentage of everything you spend to a named charity. Oxfam for example runs a credit card through Co-operative Bank. Apart from an initial donation of up to £17.50 Oxfam gets 25p for every £100 you spend on the card. But it is much more efficient to take out a cashback card – which credits you with up to 1% of what you spend – and then at the end of the year Gift Aid that amount to charity.

Tax tips
If you are over 65 and your income is more than £21,800 the higher tax allowance given to older people will be reduced. But any Gift Aid donations can be deducted from your income before this calculation is done. So if you have made Gift Aid donations make sure that the Revenue is aware of them and gets your tax allowance right. For example if you donate £100 to charity in the year using Gift Aid you can reduce your income by the grossed up amount of £125 and deduct that from your income. If that brings your income below £27,790 (or £28,090 if you are over 75) that will increase your tax allowance by up to £62.50 and mean you pay £12.50 less tax.

For those paying the higher 40% rate of tax Gift Aid is an even better deal. The 20% basic rate tax relief is reclaimed by the charity. The other 20% tax relief has to be reclaimed by the donor who can choose whether to keep the gain or pass it on to a charity. The arithmetic works like this.

You write a cheque for £100. The charity reclaims £25 basic rate tax and the £3.21 transitional supplement. So it gets £128.21. You then reclaim another £25 tax relief when you fill in your self-assessment tax form. That means the gift has cost you just £75. If you want to make a gift to charity which will end up costing you £100 net then you have to add a third to that amount and write a cheque for £133.33. The charity gets £37.60 from the Treasury and you reclaim £33.33 with your self-assessment. The outcome is that you spend £100 and the charity gets just over £170.

If you are a higher rate taxpayer it is important to keep records of all money that you give to charity so that you can put the correct figure on your self-assessment form. The form also gives you the opportunity to give the tax relief direct to a charity of your choice.