Gift Aid Calculation Farmula

Gift Aid is a UK tax relief program. It encourages charitable giving. Charities claim extra money on donations from UK taxpayers. By using this scheme, charities reclaim 25p for every £1 donated.

To calculate the Gift Aid on charities the understanding of the formula is very crucial. This article will cover the key formulas for calculating Gift Aid, tax relief, and the net cost of a donation.

Total Gift Aid Calculation

The first step in assessing the impact of Gift Aid is to calculate the total donation value, which includes the extra amount the charity claims. The formula is as follows:

The formula is as follows:

Total Gift Aid = Donation × ( 20 100 − 20 + 1 )     

Where:

  • Donation: The amount of the initial donation made by the donor.
  • 20%: The base tax rate used in the calculation.

This formula accounts for the additional 25% (Gift Aid) that a charity can claim from the UK government on top of the original donation. The fraction   20 100 − 20 \frac{20}{100 – 20}      captures the impact of this uplift.

Tax Relief Calculation

 The formula for calculating tax relief is:

Tax Relief = Total Gift Aid × ( Tax Rate − 20 100 )     

Where:

  • Tax Rate: The percentage of tax selected by the donor (20%, 40%, or 45%).

This formula demonstrates how higher-rate taxpayers (40% or 45%) can reclaim the difference between their tax rate and the basic rate of 20%.

Net Cost Calculation

After accounting for the tax relief received, donors can calculate the actual cost of their donation using the following formula:

Net Cost = Donation − Tax Relief \text{Net Cost} = \text{Donation} – \text{Tax Relief}     

Example Scenario

Let’s break down an example where a donor contributes £100 and is subject to a 40% tax rate:

  1. Total Gift Aid:

    Using the Gift Aid formula, the total donation amount, including Gift Aid, is calculated as:

    £ 100 × ( 20 100 − 20 + 1 ) = £ 125 £100 \times \left( \frac{20}{100 – 20} + 1 \right) = £125     

    This means the charity receives £125 instead of £100, thanks to the Gift Aid claim. Try our online Gift Aid Calculator for easy and accurate calculation with just one click.

  2. Tax Relief:

    For a 40% taxpayer, the tax relief is calculated as:

    £ 125 × ( 40 − 20 100 ) = £ 25 £125 \times \left( \frac{40 – 20}{100} \right) = £25     

    This £25 can be claimed back by the donor on their tax return. Try Gift Aid Tax Relief Calculator.

  3. Net Cost:

    The net cost of the donation is:

    £ 100 − £ 25 = £ 75 £100 – £25 = £75     

    Thus, while the charity receives £125, the donation effectively costs the donor only £75 after tax relief.

Conclusion

In conclusion, the Gift Aid formula benefits both donors and charities by maximizing the value of charitable contributions. By applying straightforward calculations for Gift Aid, tax relief, and net cost, donors can see the true impact of their donations while also enjoying tax savings. For charities, these formulas help them claim the full Gift Aid benefit, increasing their funds and impact without any additional cost to donors.