By the time you read this, the new regime for taxing investment income will be a matter of a few days old. For those not already aware, dividends and interest are now being paid gross and there are new allowances for interest of up to £1,000 and a £5,000 allowance for dividend income. HMRC are hoping that the new allowances will simplify the affairs of many thousands of taxpayers and help remove them from taxation altogether.
But will it? If you are a charitable person, the new rules have a sting in tail waiting for you.
A lot of those who make small charitable donations and who regularly tick the “Gift Aid” box have comparatively low levels of income. Whereas for 2015/16 and earlier the non-repayable tax credit attached to dividends was used to “pay” the income tax that is transferred to the charity when you tick the “Gift Aid” box, from April 2016 onwards the rules have changed. Do you know whether during the current year you will be receiving sufficient taxable income (meaning income above all of your allowances on which income tax is borne) to “pay” sufficient income tax to meet the amount that you are transferring to charity? I suspect that a lot of people do not.
For example, in 2015/16, Mrs P had pension income of £10,500 and dividend income of £4,000. She donates £800 to charity under gift aid each year and the £200 tax on the gift aid is “paid” from the non-repayable tax credit on dividends. For 2016/17, however, even though Mrs P’s income remains the same in this example, the new rules mean that the dividends no longer carry a non-repayable tax credit and are covered by the new dividend allowance. Therefore, the £444 non-repayable tax credit that used to accompany the £4,000 in dividends is no longer available to be transferred to charity under Gift Aid. The result is either an income tax bill for Mrs P for £200 (payable through Self-Assessment) to compensate HMRC for the tax it has transferred on Mrs P’s behalf – or Mrs P can no longer tick the Gift Aid box which means that the charity is unable to claim back the additional income tax.
Believing in advance that you will not be subject to income tax (like Mrs P in the example) is one thing as you can choose whether or not to adjust your behaviour as you go – you can choose not to tick the gift aid box and avoid the income tax bill – or tick it and pay your tax later. However, those with variable income portfolios may simply not know whether or not they will be paying tax until the end of the tax year as their income position will be dependent on whether or not their shares produce dividends in excess of the allowances.
For example, Mr P has exactly the same income as his spouse other than his portfolio which sometimes produces as much as £12,000 in dividends each year. Under the new rules, whereas previously Mr P had no income tax liability to pay, from 2016/17, he now has an income tax liability of up to £525 to pay (£12,000 – £5,000 allowance) x7.5%. An income tax liability of £525 is sufficient to meet the tax on a Gift Aid payment of £2,100 but there is no guarantee of receiving that level of dividend income and thus being able to make the Gift Aid payment.
For our second example, an element of help is at hand. If, like in Mr P’s case, you are happy to make charitable payments but do not wish to incur income tax charges to do so, it is possible to delay making any payments until after the end of the tax year. Then, when completing your Tax Return, after calculating the extent of your income tax liability you can determine the maximum level of charitable donations that you could have made in the previous tax year before incurring income tax. Then, prior to submission of the Tax Return, it is possible to make a charitable payment under Gift Aid and elect for it to be treated as if it had been made in the previous tax year (just ended). Provided that the payment is made before the first draft of the Tax Return is filed and before the filing date of 31 January, this will then allow you to effectively make Gift Aid charity donations that do not trigger income tax liabilities. This method of back-dating your Gift Aid donations is particularly useful for those who tithe their income to the church annually when they have variable income as they cannot, by definition, know how much they have received until after the end of the tax year.
Whilst the Revenue’s intentions may have been to reduce the compliance requirements on a lot of taxpayers by making changes to the investment regime (whilst at the same time making “Salary by dividends” less attractive for some owner directors) the sting in the tail may be that a lot of charities may find the simple act of gifting more complicated or restrictive, ultimately affecting their income.
The Chancellor Giveth and The Chancellor Taketh Away.
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.