When making charitable donations, it is common place to be asked “Can we Gift Aid your donation?”.
By allowing this claim to be made, the value of the gift to the charity is increased by 25%. So, for every £80 donated, the charity receives £100, made up of your own donation of £80 and £20 of tax reclaimed from HMRC.
On the face of it, making this claim may seem like an obvious choice, but there is a potential downside. If you have not paid sufficient income tax or capital gains tax during the year to cover the reclaimed tax, HMRC will require you to make up the difference, which may result in an unexpected tax bill occasioned from your own generosity.
Recent changes to the way in which investment income is taxed will result in many individuals, who would have previously completed the Gift Aid declaration without concern, ceasing to be taxpayers. These changes are as follows:
- Prior to 6 April 2016, dividends were received with a notional credit of 10% which was included when calculating tax paid for Gift Aid purposes, but the notional credit has now been abolished and the first £5,000 of dividend income is taxed at a rate of 0%; and
- The savings rate of income tax offers another 0% tax band available to individuals with interest income falling within the first £5,000 in excess of their personal allowance.
These changes will disproportionately affect pensioners with modest incomes and owners of companies taking tax-efficient remuneration as illustrated below.
Although many of the individuals that will be impacted by this change are not required to prepare tax returns each year, it seems likely that, because of HMRC’s digital and information gathering powers, HMRC will soon be able to identify non-taxpayers who have made Gift Aid donations and pass on an unexpected bill to the donor.
It is therefore worth considering the position of those close to you in addition to your own position.
Various options may be available, to ensure that neither you nor the charity lose out.
For example, if you will be caught but your spouse will not, it may be beneficial for any donations to be made by your spouse, enabling the charity to benefit from the Gift Aid claim.
If you are the owner of a small company, it may be possible to make the charitable donations through your company, rather than on an individual level. Although a company cannot make donations through the Gift Aid scheme, your company should receive corporation tax relief on the donations and there may be scope to increase the cash donation made to reflect this.
If you believe that you may be adversely affected by these changes and would like to discuss them please let us know.
Illustration:
During a tax year an individual received pension income of £10,000, interest of £2,000 and dividends of £4,500. They make Gift Aid donations of £1,000.
For 2015/16:
The pension income of £10,000 and £600 of the interest received is covered by the tax free personal allowance.
The remaining £1,400 of the interest received falls within the savings rate band, so it is taxed at 0%.
The net dividend of £4,500 is treated as a £5,000 dividend, with a £500 tax credit and as the dividend falls within the basic rate band so no further tax is payable.
In this case, although no physical tax is payable, the notional tax credit of £500 associated with the dividend is treated as tax paid.
This means that up to £2,000 of Gift Aided donations can be made without incurring a tax liability and therefore there is no additional tax payable as a consequence of making the Gift Aid donation.
For 2016/17:
The pension income of £10,000 and £1,000 of the interest received is covered by the tax free personal allowance.
The remaining £1,000 of the interest received falls within the savings rate band, so it is taxed at 0%.
The dividend received of £4,500 is covered by the dividend allowance, so is subject to tax at 0% and therefore no tax is payable on the dividend.
During 2016/17, any Gift Aid donations made would result in a tax liability equal to 25% of the donation made and therefore the donation of £1,000 would result in a tax liability of £250 for the generous donor!