Have you paid enough tax to ‘cover’ your Gift Aid donations?
A client asking why they are being taxed on their gift aid-donation got me to ask, “Have you paid enough tax to ‘cover’ your Gift Aid donations?”
HMRC are very keen to ensure that Gift Aid donors are paying enough tax. In recent times, they have come under pressure from the National Audit Office and the Public Accounts Committee to take steps to reduce the amount of Gift Aid incorrectly claimed. The public therefore need to be better equipped to know if they can or cannot make charitable donations with Gift Aid added.
Most Gift Aid donors will be giving very intentionally and will understand that they will need to have paid enough income (or capital gains) tax in each tax year (6 April to 5 April following) to equal or exceed the Gift Aid tax that we reclaim on their Gift Aided donations.
However, the tax landscape has changed significantly over the last few years. HMRC tell us that around 50% of adults in the UK no longer pay any income tax at all, up from around 42% only a few years back. Why is this? Some reasons are:
- The increase in the amount of taxable income that a person can receive before actually being liable to pay a penny of tax. The tax free allowance (also known as the ‘personal allowance’) has been increased by the Government from £6,475 in 2010/11 to £11,000 in 2016/17 with a promise of further increases to £12,500 before the end of the current Parliament in 2020.
- Pension contributions can act to further reduce taxable income.
- Investment income can be tax free if earned within an Individual Savings Account (or, ISA) and the ISA savings limit for cash investments has increased from £5,100 in 2010/11 to £15,240 in 2016/17.
- From 2016/17 the first £5,000 of dividend income is not taxed.
- Also, from 2016/17 basic rate taxpayers will pay no tax on savings interest of up to £1,000.
Other changes (for example to the rent a room relief) take more income out of the income tax net.
Example Gift Aid Tax and Income Tax:
Mary (whose husband works full time) earns £250 per week (£13,000 p.a.) from her part time job. She faithfully pays a tithe of 10% of her income into a Gift Aid account. She has also authorised her employer to deduct 15% of earnings to be paid into her personal pension scheme. She has savings interest from a cash ISA and a bank savings account, as well as some good dividend income from shares left to her by her late father. How much tax will she pay in 2016/17?
| Weekly | Annual | ||
| Earnings | 250.00 | 13,000 | |
| Interest income from Mary’s ISA | 2.50 | 130 | |
| Dividend income | 16.23 | 844 | |
| Bank interest | 0.50 | 26 | |
| Gross income | £269.23 | £14,000 | |
| Pension contributions | 37.50 | 1,950 | |
| Gift Aid donations | 25.00 | 1,300 | |
| Net cash after pension contributions and gifts to charity | £206.73 | £10,750 |
Gift Aid donations are deemed to be paid after Mary has ‘deducted’ basic rate tax, which is 25p for each £1 of donation made. It is 25p because the 20% basic rate of tax is calculated on the gross donation of £1.25 (£1 + the 25p tax).
The gross value of her Gift Aid donations (which is the tax deductible amount) is £1,300 + £325 = £1,625. In other words, she has made Gift Aid donations of £1,625 but has ‘deducted’ £325 of tax and paid the balance, £1,300 to the charity. In signing her Gift Aid declaration, she has effectively said that she will have paid at least £325 in income tax, and authorised us to reclaim that £325 from HMRC for charitable use.
But has she paid enough tax?
Let’s see …
| Annual | |||
| Earnings | 13,000 | ||
| Add: ISA income | Tax exempt | 0 | |
| Add: Dividend income paid gross | Under £5,000 | 0 | |
| Add: Bank interest paid gross | Under £1,000 | 0 | |
| Less: Pension contributions | 1,950 | ||
| Taxable earnings before personal allowance | £11,050 | ||
| Personal allowance | 11,000 | ||
| Income subject to tax | £50 | ||
| Income tax at 20% | £10 | ||
| Tax reconciliation: | |||
| Tax paid under PAYE | 10.00 | ||
| Tax deducted from Gift Aid donations, reclaimed by Charity | 325.00 | ||
| Shortfall in tax paid | £315.00 |
So, despite earning £13,000 per year and being left with an average of £206.73 each week before tax but having paid her pension contributions and Gift Aid donations, Mary has not paid sufficient income tax and now owes HMRC £315.00 for the year.
Is that it?
Well, not necessarily. If Mary’s husband earns enough to ‘take on’ Mary’s giving under Gift Aid (in addition to any Gift Aid donations that he may make), he could do so, provided that he has made a Gift Aid declaration, has paid enough tax himself, and the donations are paid out of the bank account that receives his income (for example, a joint account with Mary).
Alternatively, Mary could reduce either her pension contributions or her Gift Aid donations in order to make sure that she has enough tax on her earnings to ‘cover’ the amount of tax that is reclaimed on her Gift Aid donations.
Action Points Concerning Income Tax and Gift Aid
If your taxable income is close to the level of the personal allowance, you should be considering if you have paid enough tax to support your Gift Aid donations, using the example above as a guide. If you pay PAYE tax, your payslip can give you an idea of how much tax you are paying.
If you find that you haven’t paid enough, you should notify the charities that you have supported, immediately. They may be able and willing to adjust a future Gift Aid claim to repay any tax due on your behalf (but they are not obliged to do so, as it is your responsibility as donor to make up any shortfall).