JUNE 2016 - Gift Aid Tax Relief - An Unintended Consequence?
How often have you been asked by a charity to tick the ‘Yes’ box when making a donation? You will be aware that you can only make this declaration if your donation is being paid from income which has already suffered tax in your hands and the charity can then reclaim 25p in every pound donated.
Have you ever thought, however, what is meant by ‘tax suffered’. This is more than just tax paid over to HMRC either by cheque, bank transfer or through PAYE deductions. The term extends to tax credits attaching to dividends. Until 5 April 2016 this represented a 10% credit which could be used to satisfy any basic rate tax liability which would otherwise arise on the dividend.
Tax credits on dividends were abolished from 6 April 2016 and a £5,000 dividend allowance and specific dividend tax rates were introduced on that date. The introduction of the dividend allowance means that some income will not suffer tax either by payment or credit and this may have a consequential effect on low earners who make modest donations.
Low Income Donor
Where, for example, a pensioner made a charitable donation of £800 in 2015/16 out of dividend income of £5,000, (other income being covered by the personal tax allowance), then the charity would be able to claim £200 back from HMRC out of the ‘tax credit’ of £555 attaching to the pensioner’s dividend. The donation is made out of income that has ‘suffered tax’ notwithstanding that no tax has been paid by the pensioner to HMRC.
If the same scenario arose in 2016/17 then the pensioner will have no tax credit on the £5,000 dividend, will not pay any tax to HMRC by virtue of the £5,000 dividend allowance and there will therefore be no ‘tax suffered’ to allow the charity to claim £200 from HMRC. If the pensioner has made a gift aid declaration then £200 of tax must be paid to HMRC by the pensioner to allow the charity to make the claim. The pensioner has therefore inadvertently incurred a tax liability simply because the ‘yes’ box has been ticked when making a donation.
A similar unintended consequence can be experienced by a wealthy donor, below pension age, whose taxable income may solely comprise dividends from an investment portfolio. For example, if a £320,000 gift aid donation is made from £500,000 of dividend income (any other income being negligible) then the donor will need to have ’suffered tax’ of £80,000 to cover gift aid.
If this example was in 2015/16 then the donor would have paid sufficient tax, including the tax credit on dividends, to cover the gift aid donation. If, however, this scenario takes place in 2016/17 the tax liability on the dividends will be slightly over £54,000 with no tax credit to augment it and there is therefore a shortfall of £26,000 which the donor will need to pay to HMRC if the charitable donation has been gift aided.
If gift aid donations in 2016/17 are likely to be affected by these changes then the donor may be able to carry donations back to 2015/16 to use up tax credits from that year. This will be considered on a case by case basis but any carry back must be made in the 2016/17 self- assessment tax return. It is important therefore that such issues are addressed before the return is submitted to HMRC this year.