Some amplification of Chris W. Rea's answer:

The basic principle is that donations to recognised charities are exempt from income tax, so you can effectively make them out of your gross salary. For ease of administration, the Gift Aid mechanism is normally used so that basic rate tax is reclaimed without the taxpayer having to do anything apart from accepting the declaration - though the receiving charity has to do some work instead. Many higher-rate taxpayers will already have to fill in a tax return, and those that don't can write to HMRC separately to claim the rebate.

There are some alternatives to direct use of Gift Aid:

• Some employers operate a "payroll giving" scheme where donations are made directly out of gross salary. In that case, Gift Aid doesn't apply at all, and there's no extra rebate for higher rate taxpayers.

• There are some charities, such as the Charities Aid Foundation that just exist to route donations to other charities. They typically operate "charity accounts", which you can fund with either payroll giving or the Gift Aid route as with normal donations. You can then pass the money onto "real" charities when you want. The advantages of this approach are firstly that you can get the tax benefit at the time you fund the account rather than when the final donation is made, and secondly that small charities find Gift Aid an administrative burden and this method moves the burden to someone else. The downsides are that typically there is an administrative fee - 5% with Charities Aid Foundation - and that once money is in a charity account you can't get it back for yourself.

There are also some extra twists:

• With Gift Aid, in addition to the 25% that comes from the basic rate tax rebate, until April 2011 charities also get an extra 3%. This is a transitional provision because basic rate tax used to be 22% (which was equivalent to a 28% rebate), so since in practice people gave the same amounts out of net pay after the tax change as before, charities lost out.

• Although the general principle is that only genuine donations are tax exempt, so you can't receive anything in exchange, there are some exceptions. The most significant ones are:

  • The entire value of an admission fee can count as a donation if the visitor voluntarily pays an extra 10% on top of the "normal" admission fee, or if the admission fee covers a period of 12 months or longer. For higher rate tax payers paying the extra 10% will clearly be worthwhile as they can then claim back more than the extra they paid, but most people opt to pay the extra anyway given the benefit to the charity it provides. http://www.hmrc.gov.uk/charities/gift_aid/rules/admissions.htm#2

  • Membership subscriptions can often be counted as donations: http://www.hmrc.gov.uk/charities/gift_aid/rules/memb-subscript.htm

  • You can receive things to the value of a small percentage of the donation as "tokens of appreciation": http://www.hmrc.gov.uk/charities/gift_aid/benefits.htm#4

  The full list of exemptions is here: http://www.hmrc.gov.uk/charities/gift_aid/rules/index.htm

• Some charity shops operate a scheme where when you give them things to sell, they treat those things as still belonging to you until they sell them, and then consider the money from the sale as a donation from you, which thus attracts Gift Aid. (They have to write to you at that point to give you the chance to change your mind about the donation, but I doubt people ever do that!)

If you're a higher rate tax payer, it's well worth keeping records of donations, as they can soon add up to a nice refund :-)