At a time when frozen tax thresholds are pulling more people into higher tax bands, people can effectively increase their tax-free Personal Allowance by using HMRC’s ‘four times’ Gift Aid rule. By reducing the impact of fiscal drag, you can earn more before paying income tax.
You can increase your tax-free allowance by reporting charitable gifts, including items donated to charity shops that are sold under Gift Aid. Crucially, your donations must not be worth more than four times the amount of tax you paid in that financial year.
Once you’ve made a Gift Aid declaration, your basic and higher rate tax bands are extended by the gross charitable donation, thereby increasing the proportion of your income taxed at the lower rates. For example, if you’re a higher rate taxpayer (40%) and you donate £100 to charity, your basic rate band is extended by £125. That £125 of income that would have been taxed at 40% is now taxable at 20%.
Please do get in touch to discuss your options further as there are other aspects to take into consideration.
