Welcome relief for low income savers but watch out for Gift Aid ‘sting-in-the-tail’, says charity

Savers on low incomes are eligible for extra tax relief from this April. The Government has announced that there will be no tax on savings income of up to £5,000 above the personal allowance. But the Low Incomes Tax Reform Group (LITRG) is warning savers who give to charity to watch out for the implications of the changes for any donations they make using Gift Aid. If they are no longer a taxpayer they will no longer be eligible for Gift Aid and could face an unanticipated bill from the taxman if they continue to claim it.

From 6 April 2015 the starting rate of tax for savings income (such as bank or building society interest) will be reduced from 10% to 0%, and the maximum amount of taxable savings income that can be eligible for this zero starting rate will be increased from £2,880 to £5,0001.

Commenting on the changes, LITRG Chairman Anthony Thomas said:

“It is good news that savers with total taxable income of less than £15,600 will be able to benefit from a zero rate of tax on their savings income. It is key for savers to be made aware of it but also needs to be easy for them to determine whether or not they are eligible to claim relief. HMRC’s new online calculator2 should assist with this.

“There is, though, a possible sting-in-the-tail for savers who make donations under Gift Aid. For Gift Aid to work properly, the donor must have paid enough tax during the tax year to cover the tax the charity will recover on the gift.  If they have donated to a charity under an enduring Gift Aid declaration but paid no tax, or insufficient tax, the charity will still assume the donation has come from someone paying basic rate income tax at 20% and claim this back from HMRC. The unsuspecting donor might then be faced with a bill for the difference in income tax to be paid back to HMRC.

“Savers who make regular donations under Gift Aid, or who have enduring Gift Aid declarations in place would be well-advised to review their position prior to 6 April. If they think they will no longer be a taxpayer in 2015/16, due to the 0% savings rate, they may want to discuss the position with the charity with a view to cancelling their Gift Aid declaration, and reducing their donation so that they are not out of pocket.’’

Notes to editors:

1.       This means that, if their total taxable income is below £15,600 in 2015/16, savers will not be liable for tax on any interest they receive (this figure may be different for people born before 6 April 1938, those entitled to Married Couple's Allowance or Blind Person's Allowance or those in receipt of marriage allowance from their civil partner or spouse). The change to the savings rate and the increase in its band means that more savers who do not expect to be liable to tax on any of their savings income in the tax year will be able to complete an R85 form – the form used to register with a bank or building society for interest to be paid gross (i.e. without 20% tax deducted at source.) Currently an R85 form can only be completed by a saver whose total taxable income for the tax year is below their tax-free personal allowance.

More information on the 0% savings changes is available, here.

2.       HMRC’s new online calculator can be accessed, here.

3.       The Low Incomes Tax Reform Group (LITRG)

LITRG is an initiative of the Chartered Institute of Taxation to give a voice to the unrepresented. Since 1998 LITRG has been working to improve the policy and processes of the tax, tax credits and associated welfare systems for the benefit of those on low incomes.

4.       The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 17,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.