Gift Aid Hit by Dividend Tax Change
From 6 April 2016 individuals with predominantly dividend income who make Gift Aid donations could be unintentionally penalised through the scrapping of the dividend tax credit.
Gift Aid relief is available to those who pay enough tax to cover the basic rate on a grossed up donation (e.g. £20 UK tax for a cash donation of £80). Donations are treated as being made net of tax (the taxpayer effectively withholds the 20%), but to retain that relief donors must have paid an equivalent amount in tax or they will be liable to HM Revenue & Customs for the shortfall. This means that whilst an individual currently in receipt of mostly dividends and who makes Gift Aid donations has their basic rate tax taken care of, but from April 2016 no such tax will have been paid and the tax office could pursue them for the arrears.
Gift Aid tax trap
This looming tax trap has gone largely unnoticed up until now, but concerns are being raised that donors with little income other than dividends will lose out.
Those most affected
The new dividend regime from April 2016 comes with a £5,000 Dividend Tax Allowance, so dividend income up to this limit will be tax free. Also from April an individual will have a personal allowance worth £11,000.
So a person can earn up to £16,000 in 2016/17 and pay no tax at all. Any Gift Aid donations made by such a person will therefore land them with a tax bill.
Pensioners with just a state pension and a small amount of dividend income will be particularly affected. Conversely, an individual receiving large amounts in dividends but with minimal other income and who makes sizeable Gift Aid donations, could find their tax bill increasing substantially to cover the tax withheld on the donations.
To avoid an unwanted tax bill, donors caught by the change will need to ensure they withdraw any Gift Aid declarations they have made. Some may not wish the charity to lose out on its valuable tax relief from the government and could choose to make up the shortfall themselves. Charities will now need to update their guidance to donors.
If you feel you may be affected by this, or wish to discuss the new dividends tax regime generally, please contact your usual Mitchell Charlesworth advisor.