Gift Aid is deducted from taxable income instead of raising the rate limits (ITA 2007 s. 414) #2253

What's wrong

allowances adds gift_aid, so income tax deducts the net Gift Aid donation from taxable income. The law gives no deduction. It treats the gift as paid after basic rate tax and raises the rate limits by the grossed-up gift, so a basic rate donor gets no relief and a higher or additional rate donor gets the difference in rates on the grossed-up amount.

Main e89b8abc, 2026-27, one adult aged 40 in the North West, with an £800 Gift Aid donation (£1,000 grossed up):

The law

• ITA 2007 s. 414(2)(a). The gift is treated as made "after deduction of income tax at the basic rate".
• s. 414(2)(b). "The basic rate limit" and "higher rate limit" are increased by "an amount equal to the grossed up amount of the gift". For a Scottish taxpayer, the upper limit of the Scottish basic rate and the limits for every Scottish rate above it are increased as well (https://www.legislation.gov.uk/ukpga/2007/3/section/414).
• s. 58. The grossed-up gift reduces adjusted net income (personal allowance taper, HICBC).

In the model

• variables/gov/hmrc/income_tax/allowances/allowances.py lists gift_aid among the allowances, and received_allowances_earned_income sets them against income.
• gift_aid_grossed_up exists but only capital_gains_tax reads it. That formula already does what the law says: it takes gift_aid back out of allowances and extends the basic rate band by the grossed-up gift.
• adjusted_net_income does not deduct the grossed-up gift. Pension contributions do not reduce adjusted net income (ITA 2007 s. 58), so the personal allowance taper and HICBC ignore them #2243 covers the same gap for pension contributions.
• Relieve pension contributions to relevant earnings and charge the annual allowance excess once #2240 notes that "the model deducts relief at source and Gift Aid from income" and adds them back for the annual allowance charge, so a fix here has to move with it.

Suggested fix

Take gift_aid out of allowances. Raise the basic and higher rate limits (and the Scottish equivalents) by gift_aid_grossed_up wherever income tax applies its bands. Deduct gift_aid_grossed_up from adjusted net income. Drop the add-backs in capital_gains_tax and, once it lands, #2240.

Found by the PolicyBench UK reference audit: 7 of 49 audited cells so far turn on this (for example a household with £4,821 of Gift Aid whose allowances the model raises to £17,391).