A tax hike is about to hit some people who give to charity, following new rules for dividends starting this April.
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.
Which means that whilst an individual currently in receipt of mainly dividends and who makes Gift Aid donations has their basic rate tax taken care of, from April 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 to now, but with the new dividends tax regime approaching and the government publishing more details, concerns are being raised that donors with little income other than dividends will lose out.
Those most affected
The new dividend regime from April 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 his tax bill increasing substantially to cover the tax withheld on the donations.
A person receives £500,000 in dividends and makes Gift Aid donations of £320,000 net (tax withheld is 20/80 (£80,000) = gross donation of £400,000). His tax bill in 2015/16 will be just over £28,000.
But with the same figures for 2016/17, his tax bill would be less than the tax withheld on the Gift Aid donation, which is not allowed, so his tax liability will rise to the £80,000 withheld – an effective increase in his tax liability year-on-year of 185 per cent!
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.
These changes will not affect the vast majority of our donors, but if they do please contact us so that we can amend your Gift Aid status on our database.