Gift aid has always been a way for individuals to make donations to the charity of their choice and for the charity to benefit where gift aid has been claimed. Following the changes to the taxation of dividend and interest income which were introduced with effect from 6 April 2016, this is likely to have an effect on gift aid donations going forward.
By claiming gift aid the charity receives an additional payment from HM Revenue & Customs. For the individual, when they claim gift aid they must be a UK taxpayer and must have paid sufficient tax to cover the gift aid payment. When making a charitable donation it is treated to come out of net income and is grossed up. For example, for a net donation of £100, the tax is £25, giving a gross donation of £125. It is the charity who claims the £25 from HM Revenue & Customs and the individual is able to receive income tax relief of £25 through their self-assessment tax return or PAYE tax code if they are a higher rate or additional rate taxpayer.
If the amount of relief claimed is more than the tax liability, then the taxpayer will need to pay the difference to HM Revenue & Customs. This can impact non-resident individuals who make donations and claim gift aid, but do not have any UK taxable income.
Since 6 April 2016, there have been changes to the taxation of dividend income with the abolition of the notional tax credit and the dividend exemption of £2,000 (it was previously £5,000 for the 2016/17 and 2017/18 tax years).
As the same time there were also the changes to interest, with all interest being paid gross and the introduction of the personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
With all of these changes it is possible that individuals such as pensioners or those on low incomes could now find themselves having an income tax liability to pay from their generosity in making charitable donations, as a result of having no taxable income.
In addition, individuals who receive large dividends and make substantial gift aid donations could find their tax bills increasing to cover the tax payable on their donations.
During the 2019/20 tax year, Mr Seagull has income from a pension of £12,500, dividend income of £2,000 and interest of £1,000. He makes a net charitable donation of £100 and claims gift aid.
As his total income of £15,500 is covered by the personal allowance for the year of £12,500, the dividend exemption of £2,000 and the personal savings allowance of £1,000, there is no income tax payable. Therefore, Mr Seagull will have an income tax liability of £25 (£100 x 20/80) to pay to HM Revenue & Customs as a result of claiming gift aid on his charitable donation.
If Mr Seagull does not want to end up with a tax bill, he should contact the charity to cancel the gift aid declaration, meaning that the charity will not be able to claim the tax credit from HM Revenue & Customs. He can still make charitable donations, but he should not claim gift aid as there will be no tax advantage in doing this.
Date Published: 1 November 2016
Updated: 26 February 2020