The rule allows you to increase your tax-free Personal Allowance by up to four times your earnings.
HMRC will increase your Personal Allowance with the rule (Image: Getty)
With income tax thresholds frozen for another three years, for many it will be a ‘lost decade’ of stealth tax rises pushing more people into paying more tax -but there is a way to get more allowance back.
HMRC’s Income Tax thresholds used to be increased each year in line with inflation, but in 2021 they were frozen until 2028, and now that lock has been extended for another three years until 2031.
It means that as wages rise to counter inflation, people are pushed into paying tax for the first time as they earn more than the £12,570 tax-free Personal Allowance, or move from the 20% band to 40%, or 40% to 45%.
That’s one of the reasons many people look to find ways to increase their tax-free Personal Allowance, to be able to earn more before they start losing some of the money to income tax.
One way this can be done is through reporting any gifts you make to charity, including donations to charity shops which are then sold through Gift Aid.
Your donations will qualify as long as they’re not worth ‘more than 4 times’ what you paid in tax in the financial year.
As explained by Charity Finance Group: “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. The charity claims the 20% tax from HMRC as usual; however, you also benefit from the donation due to the fact that £125 of income that would have been taxed at 40% is now taxable at 20%. The result is that you receive additional tax relief of 20% by paying less higher rate tax to HMRC.
“Similarly, if you’re an additional rate taxpayer (45%), your income tax relief increases to 25%.
“The tax-free personal allowance (£12,570 for 2023/24) reduces by £1 for every £2 of income above £100,000. However, Gift Aid donations extend the £100,000 threshold, such that the personal allowance is restored by £1 for every £2 of gross Gift Aid donations. The combined effect of the extended basic rate band and the restored personal allowance gives an effective rate of tax relief of 60%.
“The easiest and quickest way to claim relief is to complete a Self-Assessment Tax Return and include details of any Gift Aid donations made during the year.”
The government explains that your donations will qualify ‘as long as they’re not more than 4 times what you have paid in tax in that tax year (6 April to 5 April).’
