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Gift aid for non taxpayers?

Income for tax credit purposes is reduced by any money donated to charity by gift aid, potentially gaining 41p per £ donated. Does this apply to a non taxpayer too, who is unable to gift aid?

If not, would the "solution" be for the non taxpayer to "gift-aid" the nett amount, and repay the tax recovered to HMRC? Otherwise non-taxpayers seem unable to take advantage of their charitable givings for tax credit purposes

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04th Jun 2012 10:44

Eh?

If they are willing to do that why not just pay more to the charity?  The whole point of Gift Aid is that HMRC effectively refund the tax that the donor has already paid.  If they haven't paid any what's to adjust?

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04th Jun 2012 10:54

ALSO

I didn't realise that there was any deduction from the donor's income in respect of gift aided money.  I always assumed, perhaps incorrectly, that the declaration was simply to give HMRC the opportunity to check the amounts declared at the charity end, hence my confusion over the OP.  Am I wrong?

BTW I am not in practice, before the critics start!

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04th Jun 2012 11:58

I always understood that ...

Gift Aid does not reduce your taxable income. It just increases your basic rate tax band.

It wouldn't be sensible to allow people to give their money away in order to increase their ability to claim benefits in the form of tax credits. It would be a little like forcing all taxpayers to subsidise an individuals choice of charity... not that benefits (or the government) have to be sensible ;)

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04th Jun 2012 12:20

it does

Gift aid DOES reduce taxable income, but only for tax credits, not for income tax. Shirley is correct that for IT, it just increases basic rate tax band. However, my question was regarding tax credits, not IT.

Sensible or not, the law is the law. I was not asking whether it is sensible or not.

http://www.hmrc.gov.uk/forms/tc825.pdf HMRC's worksheet shows clearly how gift aid contributions reduce income, and thus increase tax credits by 41p to the pound. (Fair or otherwise).

 

TO explain my question more fully, since tax credits (unlike IT) are a combined claim for husband and wife (or unmarried equiv.):

 

If husband earns £12,000, (and wife is non earner) of which he donates £1600 net (gift aided). His income, for tax credit purposes is reduced by £2000, which increases his WTC by £820. So a donation worth £2000 to the charity has only cost him £780.

 

However, if husband earns £6,000, and wife also earns £6,000 (so for TC purposes, income is same as before, and they donate £2000 gross (they don't sign a GA because they haven't paid tax), will they be able to reduce their income (for TC purposes) to £10,000, as above?

If not, then if they did sign a gift aid declaration, donated £1600 net, repaid the £400 GA tax recovered to HMRC (either through SA or directly), then presumably they would be able to reduce their income by the £2000 for TC purposes.

 

If so, then a rather bizarre workaround.

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04th Jun 2012 12:48

Oops ... I got my hands and legs slapped!

:(

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04th Jun 2012 14:53

What?

ShirleyM wrote:

:(


Not quite sure what you mean...
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04th Jun 2012 16:13

Good Question

The HMRC guidance says that Gift Aid is available to people "who pay UK tax" - a statement which is typically vague. As you rightly say, if it transpires that a taxpayer has not paid enough tax in a particular tax year for full relief, he must repay the shortfall either through his tax return or on form P810.

Since gift aid declarations can cover future (or even past) years' contributions, it follows that the taxpayer should strictly keep a tally of the total such payments made each year to review their position.

Your question I think is whether a taxpayer can make gift aid payments when he is aware that he will not be paying tax in a particular year. If you redefine "who pays UK tax" with "who has taxable income"  or "who is subject to the UK tax regime" the answer would be yes.

My gut feeling is that the definition is pretty broad and you can elect to gift aid payments even in a low earnings year - but don't quote me! This would of course make your TC scheme valid.

 

 

 

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04th Jun 2012 16:59

gut feelings

thanks Thomas; I agree. But bizarre

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Yes

I'd agree that a donation could be made by a non-taxpayer and a gift-aid declaration could be made.  Assuming all the other criteria of S.416 ITA 2001 were met, then it would be a "qualifying donation" both for the purposes of a charge under S.424 ITA 2007 and for a reduction in income for tax Credits purposes under Reg. 3(7)(b) of the Definition of Income Regulations.

I'm unsure though over the wisdom of making an 80p donation, plus a 20p tax charge, in order to obtain 41p of tax credits. By my reckoning, you can save the client 59p by suggesting to them that charity starts at home.

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06th Jun 2012 16:27

gift aid and IT

re: "Gift aid does not affect taxable income it just widens the basic rate band".

It also affects your total income for calculating reduced allowances such as age related allowance and the reduced in personal allowance for income over £100K.

So for example a 40% tax payer on say £50,000 making a gift aid donation of £1000 will get a reduction of £250 in their IT bill (due to BR widening by £1250)

A 40% tax payer on £110,000 making a gift aid donation of £1000 will benefit from a reduction of £500 ( £250 due to BR widening and £250 from their PA not reducing as much)

 

 

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06th Jun 2012 18:11

This also works for personal pensions

Just in case anyone didn't know this also works for personal pensions.

e.g.

Self-employed husband with £24,000 profits, wife working with £6,000 salary, 2 kids

Combined income for tax credits: £30,000

Maximum tax credits: £10,596

Reduction due to income: (6420-30000)*.41 = £9,668

Tax Credits: £928

If, however the husband can contribute £100 a month to a pension fund then £1,500 is taken off the amount for tax credits purposes (100*12)/.8

Therefore:

Combined income for tax credits: £28,500

Maximum tax credits: £10,596

Reduction due to income: (6420-28500)*.41 = £9,053

Tax Credits: £1,543

 

As you can see this is an excellent way to save for retirement - it only costs you £39 to get £100 into your pension fund!

 

If you have a good estimate of profits or income before the end of the tax year you can also advise clients to put extra into pension funds before the tax year ends in order to stay within the income disregard rules for Tax Credits as well (which could potentially save the client several thousand pounds for only a few hundred put into the pension fund)

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06th Jun 2012 18:19

Housing Benefit

Discountants wrote:

As you can see this is an excellent way to save for retirement - it only costs you £39 to get £100 into your pension fund!

Take it a step further, for someone that also claims Housing Benefit/Council Tax Benefit, with a combined reduction of 85% of excess income. Income is reduced by 50% of pension contributions, such that:

the £100 pension contribution increases HB/CTB by (100/2 *.85) i.e. £42.50, for a contribution that only cost £39. So a cash GAIN of £3.50. (However the 41% increase in TC is reduced by the 85%, so not as good as it sounds.

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