Check your tax position before giving under Gift Aid because of imminent changes, advise tax experts

With the start of the new tax year just two weeks away, the Low Incomes Tax Reform Group (LITRG) reminds individuals who give to any charity or Community Amateur Sports Club1 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.

LITRG has issued the 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, as explained below.

Anthony Thomas, LITRG chairman, said:

“We remind individuals on low incomes 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.

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.

Notes for editors

1.                   Clubs must apply to be a CASC. CASC allows local amateur sports clubs to register with HMRC and benefit from a range of tax reliefs, including Gift Aid, where they meet qualifying conditions. Once registered as a CASC, a club cannot apply to be recognised as a charity. For more information visit: https://www.gov.uk/government/publications/community-amateur-sports-clubs-detailed-guidance-notes/community-amateur-sports-clubs-detailed-guidance-notes

2.                   Low Incomes Tax Reform Group

The LITRG is an initiative of the Chartered Institute of Taxation (CIOT) 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.

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. The CIOT’s 17,600 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.