Dividend tax credit abolition will hit gift aid
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  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.
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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.