In giving we receive – tax benefits of charity giving
QUESTION: As a salesman for a local company, I have received a substantial bonus for my performance throughout the year and I would like to give some of it to a number of charities. I am a higher rate taxpayer. What are the tax implications?
ANSWER: Christmas is a time of giving and making charitable donations to those who need it most is a great way to spread festive cheer. Where an individual gives money to a charity, and a Gift Aid declaration is made, the gift is a Gift Aid donation.
The amount donated is treated as if it was made after deduction of income tax at the basic rate in force for the tax year of gift; for example, a donation of £1,000 in tax year 2019-20 is deemed to have been paid after deduction of income tax of £250 (1,000 × (20/80)).
This has two consequences. Firstly, the charity may reclaim the income tax (£250 in the example) from HMRC. Secondly, the individual is assessed to income tax by reference to the grossed-up amount of the donation (£1,250 in the example).
This may benefit the individual in two ways: firstly it extends the individual's basic rate and higher rate bands; and secondly it reduces the individual's adjusted net income.
There is no additional benefit for the basic rate taxpayer, and the non-taxpayer should tread carefully. If insufficient tax has been paid to cover the amount reclaimed by the charity, HMRC could seek to recover the lost funds from the donor.
The amount of the grossed-up donation is added to the individual's basic rate and higher rate bands for the year of gift. The main consequence of this is that it reduces the amount of income that is taxed at the higher and additional rates. Returning to our example, and assuming that the donor is a higher rate tax payer, that person's basic rate band will be increased by £1,250. This means that income of £1,250 will be taxed at 20 per cent, rather than 40 per cent, saving the donor tax of £250.
Therefore, the cost of the donation to the individual falls to £750 (£1,000–£250). The donor has the option of treating the donation as having been made in the previous tax year.
This relief – commonly referred to as higher rate relief – is widely known, understood and claimed: the latest statistics show that higher rate relief costs the government over £500m a year. There is another consequence of the extension of the basic and higher rate bands that is often overlooked: a person's savings allowance is reduced from £1,000 to £500 where they pay tax at the higher rate, and is removed entirely where they are additional rate taxpayers.
The making of a Gift Aid donation could have a significant impact on a person's tax liability where that person has income just over the basic rate or higher rate band. A similar point applies with regard to the transferrable marriage allowance.
It is important to note that Gift Aid does not apply to donations from limited companies.
It is important to be aware of the reliefs available for Gift Aid donations before deciding if and how to give to charity. For accountants and tax advisers, it is important to ensure that clients remember to let you know when they have made a Gift Aid donation in order to ensure they get the right amount of tax relief.
:: Malachy McLernon (firstname.lastname@example.org) is a director of PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.