Charities are missing out on £560m of Gift Aid every year due to a lack of awareness about how the scheme works, research from HM Revenue & Customs has found.
Gift Aid allows charities to claim an extra 25p for every £1 donated by eligible UK taxpayers and accounts for approximately £1.3bn in charitable income every year.
But the HMRC research report, which was completed in September 2016 but published today, says that Gift Aid is not claimed on about a third of donations that are eligible.
The report says awareness among the public and charities about how the scheme operates is one of the biggest reasons why so much Gift Aid goes uncollected.
About 30 per cent of donors in the research said they had a "fairly poor" understanding of Gift Aid and 11 per cent said their understanding of the scheme was "poor".
The government said it was therefore supporting Gift Aid awareness initiatives and would be writing to 50,000 small charities to raise awareness and understanding of the Gift Aid Small Donations Scheme.
GASDS, which allows charities to claim Gift Aid-like relief on up to £8,000 of small cash donations each year without individual paperwork, has recently been simplified after it was criticised by charity umbrella bodies for being inaccessible for many small charities.
Robert Jenrick MP, Exchequer Secretary to the Treasury, said: "The UK has thousands of brilliant charities, all working hard to make people’s lives better. Through Gift Aid, we are already giving charities an extra £1.3bn of funding so they can continue their important work.
"We know how crucial this funding is. This is why we’ve just written to 50,000 charities to tell them about the GASDS, which makes it even easier for charities to claim a 25 per cent top-up on their donations."
The Charity Finance Group said it would be running a Gift Aid awareness day on 4 October to highlight the scheme and raise understanding among charity staff and volunteers about how it operates.
The CFG will also commission research to understand how best to explain Gift Aid to the public and is providing free materials for charities to use on Gift Aid Awareness Day.
Caron Bradshaw, chief executive of the Charity Finance Group, said: "Gift Aid is vital to the charity sector and supports the work of tens of thousands of organisations. Without it, our sector would reach fewer people and deliver less impact.
"CFG wants to give practical support to charities so that we can boost the amount of Gift Aid claimed. At a time when charities are struggling to meet demand, every penny counts."
Daniel Fluskey, head of policy and external affairs at the Institute of Fundraising, said: "The IoF has pushed for improvements to the system to make it easier for supporters to give Gift Aid. We are glad to see that HMRC is committed to ensuring that the system works as best as it can to deliver maximum value for charities.
"We are pleased to be part of HMRC’s working group to review the recommendations of the report and look forward to working together so that charities can benefit from the extra money that could be claimed."