Tax Adviser Tax Help for Older People
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Dividend tax credit abolition will hit gift aid

2nd Feb 2016
Tax Adviser Tax Help for Older People
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Richard Service warns charities to appreciate the adverse effect on their gift aid donors of the abolition of the dividend tax credit.

There’s been minimal comment or publicity of what may be an unintended hit to charitable giving.   Although it will be individual donors, not the charity, who will pay the penalty for falling into this new trap, it is incumbent on charities to make sure their donors are aware of the change, if nothing else to preserve donor goodwill. Advisers should work with their charity clients to help them alert affected gift aid donors. The change takes effect on 6 April 2016. However donors hit by this change may be able delay the effective start date to 31 January 2017.

What’s the problem?

The tax credits that currently attach to dividends can be used to discharge an individual donor’s requirement to account for basic rate tax deducted from gift aid payments. From 6 April 2016 dividends will no longer carry a tax credit. While there’s been much comment on the increase in the marginal rates of tax on dividend income there’s been no, or minimal, coverage of the abolition of dividend tax credits, perhaps because the 1999 abolition of entitlement to claim payment of the tax credit means dividend tax credits are for the most part an anachronism. 

Profile of affected donors

Typically donors who currently rely on dividend tax credits to cover the basic rate tax withheld from gift aid are at the opposite ends of the income spectrum. 

Largest by number, but smallest in terms of the amounts of tax involved, are donors with low non dividend income. Most are pensioners whose personal allowance covers their state pension and other non-dividend income such as occupational pension. They have up to £5,000, or a little more, of dividend income a year. Currently they have no tax liability (dividend income is all within the basic rate band and is covered by tax credits). They’ll have no tax liability post 6 April 2016 due to the dividend allowance. 

However here’s the fundamental – perhaps unnoticed – change.  Whereas their dividend tax credits satisfy the gift aid withholding tax, from 6 April 2016 there will be no such dividend tax credits leaving those taxpayers exposed to assessment on the basic rate tax withheld from gift aid payments.

At the other end of the income spectrum wealthy generous benefactors may be affected. Take an entrepreneur who has either handed on running the company or takes minimal remuneration, or an individual whose income is from an equity portfolio. Some with this profile can be surprisingly generous.   

Say an individual has £500,000 dividend income (and let’s assume other income is minimal) and gives away £320,000 under gift aid. His tax payable for 2015/16 will be £28,000; the taxpayer is left with net income of £152,000. With the same facts, for 2016/17 his tax payable increases by more than 180% to £80,000, leaving net income of £100,000 (in essence, next year’s tax payable cannot be less than the tax withheld from the gift aid payment).

Stay of execution for some

While the dividend tax reform takes effect on 6 April 2016, the entitlement to carry back gift aid payments made prior to filing date of the tax return will allow access to unused 2015/16 dividend tax credits. It’s important to start informing affected donors as prompt filing of the 2015/16 tax return may deny them some or all of this transitional benefit. Once the tax return is filed, there’s no possibility of having a second bite at the cherry by filing an amendment (see Cameron v HMRC [2010] TC00415). The long stop date for this transitional benefit is 31 January 2017.

How will the extra tax be collected?

Taxpayers who are required to file a self assessment tax return – which will include all those with high income – will have any uncovered tax collected through their self assessment.   

The situation for affected donors not currently within SA is tricky. Strictly they should be notifying HMRC of their tax liability and be brought within SA. However few, if any, will have a professional adviser and they may not be aware of this repercussion of the dividend taxation reform.

Remember that gift aid declarations once made endure and it is up to the donor to withdraw a gift aid declaration. An affected donor who neither notifies HMRC of their tax liability, nor withdraws a declaration, will be involved in tax evasion. Will HMRC pursue donors? The amounts involved for this type of donor are small and cost/benefit may make HMRC unenthusiastic in pursuing.   

The tax profession owes it to their charity clients to inform them of this, perhaps, unintended ramification of the reform of dividend taxation.

Richard Service is a volunteer adviser with Tax Help for Older People. Please consider supporting the Bridge the Gap appeal which raises funds for the tax advice charities: Tax Aid and Tax Help for Older People.

Replies (14)

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By James26
03rd Feb 2016 11:08

Particularly relevant to churches etc

Thanks for the interesting article and illustrations, very useful, certainly something I will be sharing!

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By edmundwright
03rd Feb 2016 11:12

Tax credit and Caritable giving

Yet another instance of The Law of Unintended Consequences.

It almost makes one hope that Charie Blair gives George Osbourne a bloody nose re Abolition of Mortgage relief for buy-to-let landlords, - just to help him think!

This is another development from Gordon Brown's emasculating the UK tax system by downsizing HMRC and VAT staff by taking out the 2 levels of Management who knew how the system worked. The baleful effects of that man are still with us. Does anyone really think that this consequence would be un-noticed in the olden days....when HMRC was run by professionals rather than Civil Service 'Yes People'??

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By Ian McTernan CTA
03rd Feb 2016 11:33

Slow tax creep

This is all part of the slow tax creep, as Govt needs ever increasing amounts of money to run the bloated state.

Let's not forget dividends are paid out of taxed income in the first place- the company has paid corporation tax on those profits.

If the tax system was at all reasonable dividends would come with a 20% repayable tax credit to reflect the tax already paid- but Brown put paid to that and raided pension schemes (the main reclaimers of that tax) to the tune of £20bn++.  Now the Tories are finishing the job and hitting charities with the new changes, whilst adding more tax to dividends so they now incur 27.5% for basic rate taxpayers and 45% for higher rates.

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By WWolfendale
03rd Feb 2016 12:29

Very interesting

Thank you very much indeed for this article.  It is extremely relevant to the two charities that I look after in a Finance Admin role, and I too will be sharing this information.

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By Malmsmead
03rd Feb 2016 13:42

Dividend tax credits in gift aid

I agree that the change in the taxation of dividends from 6 April 2016 will add to those donors with a potential liability under S.424 ITA 2007, but the nil rate on up to £5,000 savings income for the current tax year will have already exposed many donors to this unexpected liability.

HMRC have amended their model gift aid declarations to include a clear warning to donors of  the consequence of the tax on their income and gains for a tax year falling short of the tax recoverable by the charities and CASCs to which they gave in that tax year. Although that has been a clear statutory requirement at least since 2010, but inadequately policed, HMRC have given charities until 5 April 2016 to correct their wording, if necessary.

Donors who might be affected ought to withdraw their gift aid declarations, in the knowledge that a fresh declaration back dated for up to 4 years may always be made subsequently, if their income and gains prove to be sufficient after all.

As for donors not already required to do a self-assessment tax return, it is by no means clear that the legislation requires them to notify HMRC if their only liability arises under under S.424. I would be interested to know the views of others.

 

 

 

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By norstar
03rd Feb 2016 14:27

Maybe a stupid question

But why will the planned dividend tax not satisfy the basic rate requirement for Gift aid, even if you've paid 32.5% dividend tax but donated at only 20% Gift Aid?

Is this unlikely to change?

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By dlapish
03rd Feb 2016 15:18

Calculation

Richard,

This is very relevant and helpful to one of my clients.  I am still trying to get my head around the way the new regime will work.  Could you kindly explain your calculation of the £80,000 tax liability for 2016/17?

"With the same facts, for 2016/17 his tax payable increases by more than 180% to £80,000, leaving net income of £100,000 (in essence, next year’s tax payable cannot be less than the tax withheld from the gift aid payment)."

Thank you.

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By James26
03rd Feb 2016 17:30

Further thought not directly related...

... but relevant to people who make large charitable donations and have children.  The 31 January reference in the article being my tenuous link.  If advising such people remember it is possible for them to consider 'flip flopping' their income so that some years they don't pay back child benefit. 

E.g. Taxable Income GBP 70k with £10k gross gift-aid p.a. they can time the payments in year 2 to be before 31st January and pull them back into the year 1 tax return.  So every other year they receive all their child benefit in addition to saving the same amount of higher rate tax.  You can mix in pension AVCs as well but they obviously have to be made in year 1 where year 1 is the one you are seeking to retain child benefit by effectively getting the taxable income down to £50k.  If they are prepared to make their giving more lumpy (i.e. bring forward year 3+ gifts) then higher incomes can be flip-flopped say every 3/4 years. 

Of course this can only be done with the first filing as mentioned in the article!

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By neilrobinson5
03rd Feb 2016 18:07

Another thought

Thanks for a really interesting article.

Can I take it a bit further?

I have a client who has his own company. The company makes around £100K per year This leaves £80K after CT, which my client pays to himself by way of dividend. He then gift-aids enough each year to ensure that he remains a basic rate tax payer.

He is obviously going to be hit bit time by the new rules, as outlined in the article. On top of this, he is also going to be hit by the new 7.5% tax on dividends.

Am I correct in thinking that he can get round all of this by getting his company to make the charitable donations, or am I missing something?

 

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By jlsTax
17th Feb 2016 09:43

Company Gift Aid

You have spelt out what I was thinking for those receiving most of income as dividend from own company via dividend.  There is now a 7.5% saving by making company gift aid rather than taking dividend and making personal gift aid.  One more thing to advise clients about.

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Richard Service profile image
By Richard Service
04th Feb 2016 12:23

Responses to comments

Thanks for all who have shared their practical experiences.

Malmsmead, yes, the £5k nil rate on savings will affect some donors.  There’s been comment on the nil rate band increase and, unlike dividend tax credits, it will or should be obvious to donors with interest income (?) that they are not paying any or sufficient tax to cover gift aid.  Unlike the nil rate band on interest, the effect of the abolition of dividend tax credits is hidden: will donors who are non-taxpayers and have quite properly used tax credits to discharge the basic rate liability be aware of the new world post 5 April 2016?

Norstar – you are quite correct – the tax payable on dividends, and indeed tax payable on any income – will satisfy the basic rate withheld from gift aid.  The subtle change is that for those not paying tax and for those whose tax payment is less than the tax withheld they can currently use the dividend tax credit to satisfy some or all of the withholding (up to the amount of the 1/9 tax credit on dividends received).  This ends on 5 April.  As an aside tax credits attach to all – not merely UK source – dividends.

Dlapish asks about the second illustrative example with a tax liability for 2016/17 of £80,000.  I calculate the tax liability on income to be £50,669.  As an aside this illustrates the effect of the increase in tax on dividend income.  However the tax pain is due to the requirement to cover the tax deducted from gift aid.  The gift aid payment is £320k.  Basic rate tax withheld is £80k.  The tax payable for 2016/17 must be at least £80k to cover the tax withheld.  Hence my observation that in this example the minimum tax payable is £80k.  The reason we don’t see this in 2015/16 is due to dividend tax credits satisfying part of the gift aid withholding.

In the circumstances of neilrobinson 5 having the company make the gift aid payment would seem a much preferable course of action.  Remember that companies make gift aid payments gross nowadays.

Richard

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By AndrewV12
05th Feb 2016 10:20

Its complicated.... and that can lead to .....

Errors and omissions.

 

 

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By chewmac
06th Feb 2016 23:31

Gift aid from company
So companies can make gift aid declarations? Gross so they donate £100 and charity receives £100, and no tax top up later? And such donations are always an allowable expense? Thanks. This would seem to resolve it for a lot of small business people.

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By chewmac
17th Feb 2016 09:54

But how does company gift aid work?

Does the company need to make a formal declaration as do individuals? Are all charitable donations tax deductible for a company?

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