GIFTS - 07.09.2022

Can gift donations land you with a tax bill?

Low income

In 2020 our subscriber gave up his well-paid job and started a company. He used his personal capital to get the business going and it’s now doing well. In 2021/22 he drew a small salary from the company topped up with repayments of the start-up capital he lent it. The latter is, of course, not taxable income. Meanwhile he’s continued with his usual financial commitments including gift aid payments of just over £4,000 per year.

Gift aid agreement

When you sign up to make donations under a gift aid arrangement you’re asked to confirm that you’re a UK taxpayer and that if your tax bill is less than the tax relief you receive for the donations you’ll pay the difference to HMRC.

Tax shortfall

When you make a gift aid payment you automatically obtain basic rate income tax relief. Example.  You make gift aid donations to several charities totalling £75 per month. The amount that comes from your bank is £60. That’s £75 less 20% tax relief. Over the course of a year the tax relief adds up to £180. If you only pay tax of £100 you must make good the £80 excess tax relief to HMRC. Note. Charities often show your donations after tax relief rather than before. For example, if they suggest a donation of £8 per month, which is the amount that will be taken from your bank account, you’re actually agreeing to a donation of £10 less tax relief of £2 (£10 x 20%).

How will HMRC know?

HMRC can check with charities who their donors are and then cross check this against their self-assessment tax returns. In practice, this is rare and so the repayment of excess tax relief relies on individuals, such as our subscriber, reporting it to HMRC, usually through self-assessment.

What taxes can cover gift aid relief?

You can use both income and capital gains tax (CGT) you’ve paid, or will pay, to cover any tax relief you’ve received for gift aid donations. As long as the amount you pay in total for a year exceeds the gift aid relief you can rest easy. Tip.  If you haven’t paid enough income tax and/or CGT to satisfy the gift aid relief you’ve received in one year you can make an election to use the tax paid in the previous year (see The next step - excludes HICBC tax). HMRC achieves this by treating your gift payments as if they were paid in the earlier year. Trap. Claiming carry-back of gift aid donations to the previous year can only be made on the original self-assessment. If you don’t make a claim you can’t do so by amending your tax return.

Back to our subscriber

Based on what we know about our subscriber’s income for 2021/22 he might well owe HMRC tax for excess gift aid relief, and he’s obliged to notify HMRC of this by reporting the gift aid payments on his self-assessment return or, if he’s not in self-assessment, by sending a letter. His case is a warning to anyone whose taxable income falls dramatically for whatever reason and who make gift aid donations.

For how to elect to carry back gift aid relief, visit https://www.tips-and-advice.co.uk , Download Zone, year 22, issue 21.