Charity donations & taxation
Discussion
I am aware that it is possible claim tax relief on donations to registered charities in the UK through the Self Assessment process however; what isn't clear is whether a donation a) reduces taxable income or b) simply refunds the income tax previously paid on the donation. Can anyone confirm which is the case?
Under a) one could envisage a situation whereby a donation could drop taxable income from one bracket to another i.e from 40% to basic rate / 45% to 40%, which next tax year would impact the personal savings allowance etc.
Under a) one could envisage a situation whereby a donation could drop taxable income from one bracket to another i.e from 40% to basic rate / 45% to 40%, which next tax year would impact the personal savings allowance etc.
It reduces your taxable income. You only get a reduction in your tax payable if you are a higher rate taxpayer. The charity claims the basic rate tax back
If you pay a gift from a company, say, of £100, that reduces your taxable profit in the company by £100 and reduces your Corp tax bill by £20. The charity cannot reclaim any tax - companies pay gifts gross
If you are a 40% taxpayer and use a dividend of £80 to pay £80 to a charity, you will get £20 back in your tax return and the charity can claim £20 back from hmrc. So the net cost to you is £60 and the charity gets £100. The relief is given to you by extending the basic rate band but it will potential pull you down a band in terms of your marginal rate, and also the high income child benefit charge too - so the marginal saving can be very high indeed
At the moment it doesn't matter whether you pay personally (funded by dividends) or get your company to pay
Next year, though, as far as I can tell, it will be better for a higher rate payer with the changes in dividend tax to get the company to make all gifts as doing it personally from dividends means you will get relief at 40% but pay tax at an effective marginal rate of 46% on funds paid out as dividends.
Sorry if I answered questions you didn't want answering
If you pay a gift from a company, say, of £100, that reduces your taxable profit in the company by £100 and reduces your Corp tax bill by £20. The charity cannot reclaim any tax - companies pay gifts gross
If you are a 40% taxpayer and use a dividend of £80 to pay £80 to a charity, you will get £20 back in your tax return and the charity can claim £20 back from hmrc. So the net cost to you is £60 and the charity gets £100. The relief is given to you by extending the basic rate band but it will potential pull you down a band in terms of your marginal rate, and also the high income child benefit charge too - so the marginal saving can be very high indeed
At the moment it doesn't matter whether you pay personally (funded by dividends) or get your company to pay
Next year, though, as far as I can tell, it will be better for a higher rate payer with the changes in dividend tax to get the company to make all gifts as doing it personally from dividends means you will get relief at 40% but pay tax at an effective marginal rate of 46% on funds paid out as dividends.
Sorry if I answered questions you didn't want answering
I think I follow but here's a clarification of the question by means of a hypothetical scenario:
HMRC have said from 2016 "To be eligible for the £500 tax-free Personal Savings Allowance your taxable income needs to be between £42,701 and £150,000 a year."
Mr. J Bloggs is a PAYE earner, earns £151,000 of taxable income in 2016/17, ergo their personal savings allowance is £0. If said earner were to donate £1001 to a charity, would their personal savings allowance be
a) £500 based on their taxable income being £1499,999
b) £0 as their taxable income remains £151,000
c) None of the above because the tax regime in the UK is complete sodding mess.
HMRC have said from 2016 "To be eligible for the £500 tax-free Personal Savings Allowance your taxable income needs to be between £42,701 and £150,000 a year."
Mr. J Bloggs is a PAYE earner, earns £151,000 of taxable income in 2016/17, ergo their personal savings allowance is £0. If said earner were to donate £1001 to a charity, would their personal savings allowance be
a) £500 based on their taxable income being £1499,999
b) £0 as their taxable income remains £151,000
c) None of the above because the tax regime in the UK is complete sodding mess.
[I do find it hard to remember what the question was when as I post the answer I can no longer see it...]
Think it's (a) - but I haven't looked at the rules for that particular allowance. What you need to do is see how income is defined for that purpose by HMRC - usually, gift aid is allowed as a deduction for all purposes and reduces income absolutely. If it isn't specified fro that purpose, then gift aid (and for example pension contributions) are normally allowed as deductions for calculating income
(The slight oddity of gift aid application is that you are deemed personally to have benefited form the 20% basic rate deduction that the charity reclaims - that makes it a bit harder to "see" what is going on)
Think it's (a) - but I haven't looked at the rules for that particular allowance. What you need to do is see how income is defined for that purpose by HMRC - usually, gift aid is allowed as a deduction for all purposes and reduces income absolutely. If it isn't specified fro that purpose, then gift aid (and for example pension contributions) are normally allowed as deductions for calculating income
(The slight oddity of gift aid application is that you are deemed personally to have benefited form the 20% basic rate deduction that the charity reclaims - that makes it a bit harder to "see" what is going on)
With so many bands and thresholds existing these days for various reliefs, tax rates and allowances - all different, there is a cascade of consequences when one option is exercised.
People are using charity donations and pension contributions, not only to reclaim tax if they are higher rate taxpayers, but also to reduce the impact of having to pay back Child Benefit. The new rules on landlord interest and dividend tax thresholds will also create multiple effects depending on pension contributions and charitable payments as these types of payments all effect the point where higher rate tax starts becoming payable etc.
People are using charity donations and pension contributions, not only to reclaim tax if they are higher rate taxpayers, but also to reduce the impact of having to pay back Child Benefit. The new rules on landlord interest and dividend tax thresholds will also create multiple effects depending on pension contributions and charitable payments as these types of payments all effect the point where higher rate tax starts becoming payable etc.
TheHoof said:
I am aware that it is possible claim tax relief on donations to registered charities in the UK through the Self Assessment process however; what isn't clear is whether a donation a) reduces taxable income or b) simply refunds the income tax previously paid on the donation. Can anyone confirm which is the case?
Under a) one could envisage a situation whereby a donation could drop taxable income from one bracket to another i.e from 40% to basic rate / 45% to 40%, which next tax year would impact the personal savings allowance etc.
It's (b). It's Gift Aid, not tax relief.Under a) one could envisage a situation whereby a donation could drop taxable income from one bracket to another i.e from 40% to basic rate / 45% to 40%, which next tax year would impact the personal savings allowance etc.
The charity can claim the tax you paid at standard rate in order to 'earn' the donation. If you are a higher or additional rate tax payer, you can claim back the additional tax you would have paid. You would need to make a Gift Aid declaration to the charity.
https://www.gov.uk/donating-to-charity/gift-aid
TheHoof said:
Spoke to HMRC on this question and the answer was a resounding "we don't know". Seems the detail of the personal savings allowance hasn't been fully documented yet. Further guidance is expected before the start of next tax year.
My information is that the gift reduces the taxable income for this purpose, hence permitting the £500 savings allowance - however the draft clauses are not released to mid-December so no certainty until then.David
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