Donating? Take care over gift aid

23988357_sComing up to Christmas is often a time when many of us make charitable donations.  But here is a word of warning about gift aid.

Whilst donating to charity gives us a warm glow inside, it’s worth taking a second to fully appreciate what ticking the gift aid box means.  Most people understand that ticking the box allows the charity to reclaim tax from the government, thereby getting extra money as a result of your donation.  Where you are a taxpayer, the charity can reclaim the basic rate tax on your donation, so for every £100 donated, the charity gets an additional £25 from HMRC.

If you pay higher rates of income tax, you also benefit because you can claim higher rate tax relief, so as a 40% tax taxpayer, the £100 donated actually only costs you £75.

However, if you are a non-taxpayer or have not paid enough tax to cover the amount which will be reclaimed by the charity and you tick the gift aid box, the charity will claim the tax, but the Government will not have had an amount of tax from you to cover it ….so YOU will be required to pay over the difference to HMRC.  That is NOT what many people expect when they make a donation to charity!

stickman-ticklist-18456177_sThis is more likely to be an issue from 6 April 2016 because of new dividend and interest tax rules.  The new rules are that the first £5,000 of dividends are exempt from tax and up to £1,000 of savings income is exempt. Dividends no longer carry a “tax credit”.   So, in the past, someone who was in receipt of mainly dividends and who made Gift Aid donations would have been “deemed” to be paying basic rate tax (because of the dividend tax credit) so HMRC accepted that the tax related to the charitable donation was covered.  This is no longer the case.  And the interest rules just complicate things further.  It is therefore worth reviewing your position for 2016/17 and notifying the charities if the gift aid box is no longer appropriate (i.e. you aren’t paying enough tax to HMRC to cover the tax reclaimed by the charity), otherwise you could find yourself landed with an unexpected tax bill!

If you are going overseas and will be non-resident for tax purposes, it is also worth reviewing any donations as Gift Aid means that the tax return must be submitted by paper, resulting in a filing deadline of 31 October, so you could find yourself being charged with a late filing penalty as well as a  tax bill to cover the tax reclaimed by the charity.   Not a happy scenario when you are trying to do some good!

The other change worth noting is donations made by partnerships.  Each and every individual partner will need to make their own Gift Aid declaration for all donations. It is no longer possible for the partnership, or one partner on behalf of the others, to make a single donation against which each partner then claims relief for their share of the donation on their personal tax return. The Gift Aid declarations must now be made by each individual partner.

What a complexity!  If you need assistance in reviewing your Gift Aid position please ask your usual Dodd & Co contact.

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