Higher rate and additional rate taxpayers – extended tax thresholds
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%.