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Check your tax position before giving under Gift Aid because of imminent changes
25/03/2016, by Low Incomes Tax Reform Group, Tax Articles - Income Tax
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LITRG reminds individuals who give to charity under Gift Aid to check that they will still pay enough tax in 2016/17 to cover the amount of tax to be reclaimed.

Background

The Low Incomes Tax Reform Group (LITRG) has issued advice ahead of the new tax year to explain how changes to the tax system will impact on Gift Aid donations – which could leave non-taxpaying donors with an unexpected tax bill.

The Gift Aid scheme

The way in which the Gift Aid scheme works is that the donor effectively transfers a slice of their taxable income to the charity to which they donate. The net amount of their gift, plus the tax on it, form a gross amount on which the charity can reclaim the tax paid by the donor. For example, if an individual gives £80 under Gift Aid, the charity can reclaim £20, making a gross donation of £100.

It follow that individuals who give to charity using the Gift Aid scheme are required to have paid at least as much tax during the relevant tax year as the charities to which they donate will reclaim in respect of their donation. If they do not, they are responsible for paying the shortfall to HMRC.

There are situations in which HMRC will invite the charity to repay the tax they have claimed on a gift made by a non-taxpayer; despite that by law the donor remains responsible for paying it. LITRG is also pressing HMRC not to pursue non-tax paying people for any tax due on donations they make under Gift Aid, saying it is fairer that reimbursements should come from the charity.

The Gift Aid declaration and individuals’ overall tax position

LITRG reminds individuals who give to any charity or Community Amateur Sports Club under Gift Aid to check that they will still pay enough tax in 2016/17 to cover the amount of tax the recipient will reclaim on their donation during that tax year.

Individuals on low incomes are advised not to sign any new Gift Aid declaration unless and until they have checked their overall tax position for the coming year. Also, anyone who has signed a Gift Aid declaration in the past, but who thinks that with the changes to the tax rules shortly coming into force they may no longer be liable to pay tax, should seriously consider cancelling the declaration and finding another way to give.

Charities really should remind their donors annually about the requirement to pay enough tax to cover their gift-aided donations. Some do this, but many do not. It would be an unfortunate start to the new tax year if generosity towards a charity brought a donor an unexpected tax bill in its wake.

With more individuals being taken out of tax as annual increases in the personal allowance exceed inflation, there may be many cases where a donor who signed a Gift Aid declaration at a time when they paid income tax has since become a non-taxpayer. This is even more likely to be the case in 2016/17 for a number of reasons.

  1. From April 2016, every basic rate taxpayer will get the first £1,000 of their savings income paid tax-free, and everyone in receipt of dividend income will get the first £5,000 of such income tax-free;
  2. Also from April 2016, the system whereby a tax credit was attached to each dividend payment has been abolished, so those who used dividend tax credits to set against the tax on their Gift Aid donations will no longer be able to do so;
  3. Since April 2015, for those entitled to the starting rate of tax on savings (i.e. with total incomes below £15,600 in 2015/16 some of which was from savings), the starting rate has been zero per cent.

Useful links

Guidance notes relating to Community Amateur Sports Clubs

About The Author

The Low Incomes Tax Reform Group (LITRG) is an initiative of the Chartered Institute of Taxation to give a voice to those who cannot afford to pay for tax advice. LITRG comprises tax specialists from professional practice and the voluntary sector, from publishing and from HM Revenue & Customs, together with people from a welfare benefits and social policy background. Visit www.litrg.org.uk for further information.
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