Unintended consequences for Charitable Giving
There are some changes in store which will affect charitable giving and give some charitable donors a potential nasty shock is in store for them since the start of the tax year on 6 April 2016. It concerns the change to the way dividends are to be taxed and the impact on individual taxpayers who contribute to UK charities via Gift Aid.
Dealing with the basics first, from 6 April 2016 all UK dividends will no longer include a basic rate “tax credit” which was equivalent to 10% and satisfied in full a basic rate taxpayers liability. This 10% tax credit was also allowed to effectively “frank” the underlying tax on Gift Aid payments to charity. As a result, there was no need for the donor to make any top up payments in order to satisfy HMRC that they had a sufficiently large income tax liability to cover their Gift Aid donations. However, this has now changed and with effect from 6 April 2016, all recipients of UK dividends will no longer have a 10% tax credit but instead will be expected to pay the new dividend tax rates of 7.5%, 32.5% and 38.1% depending on whether they are the basic, higher or additional rate taxpayers.
If you add to this, the ability for taxpayers to receive up to £5,000 dividends at a “nil rate” then this could have a serious impact on the eligibility of individuals to make qualifying Gift Aid payments. Some taxpayers on relatively low incomes, which includes UK dividends, could be badly affected by the new rules.
These changes to dividend tax rates coupled with what is now a recognised government goal of increasing the Personal Tax Allowance to £12,500 over the life of this parliament, we have a double whammy in terms of the amount of tax being paid and as a result a potential knock on impact on qualifying Gift Aid payments to UK charities.
Research tells us that a typical Gift Aid donor is often somebody either on a relatively small fixed income or alternatively an entrepreneur/philanthropist who is funding his favourite charities. Both these groups could end up having to make additional payments to HMRC where they have paid insufficient tax to “frank” their Gift Aid payments.
In one example we have seen, a philanthropist could be left with a further tax liability of almost £25,000 if he was to replicate his charitable giving in the current tax year 2016/17. This is an extreme example, and not all taxpayers will be caught out in this way but it does mean charities need to be having a conversation with their key Gift Aid benefactors now in order to avoid any nasty surprises later in the tax year.
Fortunately, we still have the mechanism for Gift Aid payments to be “carried back” to a previous tax year, particularly if there a tax shortfall in 2016/17 but care needs to be taken by the donor with this election in order for it to be effective and achieve the desired tax outcome.