Gift Aid – Are you aware of a tax charge slipping under the radar?

Whilst there has been much coverage about the increase in dividend tax rates from 6 April 2016 and new £5,000 dividend ‘allowance’, one other potential matter could also impact upon an individual’s tax position.

When making a gift aid donation, the donor signs a declaration to state that the charity can reclaim the tax on the donation on the basis that the donor has paid at least the amount of tax that will be reclaimed by the charity. For example, a cash donation of £4,000 under gift aid would allow the charity to reclaim £1,000 from HMRC. The donor is required to have paid this amount of tax, at least. If the donor has not paid this amount of tax, then HMRC are well within their rights to seek payment of the £1,000 from the individual.

Where this ties in with dividend income is that currently dividend income is deemed to have a 10% notional tax credit deducted. So a dividend of £900 (amount received) is for tax purposes deemed to be a taxable dividend of £1,000 on which 10% notional tax of £100 has been paid. The £100 can be used towards the tax deemed to have been paid for the purposed of the gift aid tax reclaim.

From 6 April 2016, this credit will be abolished and a new allowance will be introduced whereby the first £5,000 of dividend income does not suffer a tax liability.

This could affect those on low incomes making small donations to charities (Example 1) and those on higher incomes making large donations to charities (Example 2).

Example 1

Let’s take the example of a pensioner receiving pension income up to their personal allowance and dividend income of say £4,500 (Taxable £5,000 – Tax credit £500). In addition, the pensioner gifts £1,600 to a charity under gift aid each year.

For 2015/16, the pensioners tax bill will be the higher of the tax on the dividend income - £500 - or the tax reclaimed by the charity on the donation – £400. Therefore the tax bill is £500 which is covered by the dividend tax credit of £500, resulting in no tax payable by the pensioner.

For 2016/17, again the pensioners tax will again be higher of the tax on the dividend income - £0 (due to new dividend allowance) - or the tax reclaimed by the charity on the donation – £400. Therefore the tax bill is £400 which will need to be paid to HMRC by the pensioner.

Example 2

Say a wealthy individual has a dividend income of £500,000 each year but gives £320,000 of this away to charity as gift aid donations.

In 2015/16, the tax bill on the dividend income will be £83,633 which is greater than the £80,000 reclaimed by the charity. In addition, the benefit of the dividend tax credit means that only £28,078 is payable to HMRC.

In 2016/17, the tax bill on the dividend income will be £54,125, which is less than the £80,000 reclaimed by the charity, meaning that the individual will need to pay £80,000 to HMRC i.e. an extra £25,875 (£80,000 - £54,125).

It is difficult to see how this can be policed by HMRC for individuals falling outside of the Self Assessment regime but we are sure given the deficit in the UK’s finances that HMRC are bound to find a way to seek out those individuals affected, if it is worthwhile to HMRC.

If you need advice, then our tax team would be delighted to help you and can be contacted on:

Darlington – 01325 349700
Durham – 0191 3842244
York – 01904 784400