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Will changes in taxation of dividends impact gift aid for charities?

19th February 2016

There are significant changes from 6 April 2016 to the taxation of dividends received by individuals.

This may restrict their eligibility for gift aid and therefore the amount which can be reclaimed by charities.

The changes are the introduction of a £5,000 nil rate band for dividend income, the abolition of the deemed tax credit attaching to dividends, and the higher marginal rates for taxpayers with significant dividend income.

These changes may take individuals out of the category of UK taxpayers for gift aid purposes, and therefore reduce the amount of tax charities are able to reclaim.  This may affect both low and high income individuals.

Low income individuals – those with, for example a pension wholly or mainly covered by their personal allowance, and with a small additional income from investments – may previously have had no income tax payable but were treated as UK taxpayers because they had a liability on dividend income “franked” by the tax credit.  In future that income may fall within the £5,000 exemption, but without the benefit of the tax credit they will no longer qualify as UK taxpayers.  If they make donations under a gift aid declaration and the charity reclaims the tax, the individual will be liable to assessment on that basic rate tax, and if not currently required to file a tax return, are strictly required to advise HMRC of their liability.

There will also be a, perhaps unexpected, impact on individuals with high dividend income, typically for those who receive little income from other sources.  Although they will be paying higher marginal rates on their dividend income, the abolition of the tax credit can mean that their total tax liability (currently actual tax plus the tax credit) is reduced to a level where it may not fully cover the basic rate tax on the gift aid payment.  Again, in these circumstances, they would be liable to account for any tax over claimed by the charity.

Where such taxpayers’ dividend income is derived from a company which they control, it may be more tax efficient for them to arrange for a (tax deductible) gift aid payment from the company rather than paying it personally from dividend income.  In that case, of course, the charity would not be entitled to reclaim tax.

While the liability for tax in these circumstances falls on the individual rather than the charity, HMRC may use gift aid “audits” of charities to identify donors who may be caught under these rules. Charities may consider including clearer explanations on their literature, and ensuring that gift aid declarations are refreshed regularly, and in particular to ensure that the wording in the new model declaration, warning donors of the requirement to have paid sufficient tax, is included.

Should you have any questions, please do not hesitate to contact Louise Veragoo, NFP Tax Director, or your usual haysmacintyre contact.