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Have you paid enough tax to 'cover' your Gift Aid donations?

Photo of Kevin Russell Kevin Russell
5 min

HMRC are very keen to ensure that Gift Aid donors are paying enough tax to support the Gift Aid claims made by charities on their donations. It is therefore important that the members of the public are well equipped in order to be sure that they can (or cannot) make donations with Gift Aid added.

Most Gift Aid donors who choose to organise their giving with a Stewardship Giving Account will be giving very intentionally and will understand that they will need to have paid enough income (or capital gains) tax in each tax year (6 April to 5 April following) to equal or exceed the Gift Aid tax that we reclaim on their Gift Aided donations.

However, the tax landscape has changed significantly over the last few years. HMRC tell us that around 50% of adults in the UK no longer pay any income tax at all.

Why is this? Some of the reasons include:

  • The increase in the amount of taxable income that a person can receive before actually being liable to pay a penny of tax. The tax-free allowance (also known as the ‘personal allowance’) has almost doubled between 2010/11 and 2021/22, now standing at £12,570.
  • Pension contributions can act to further reduce taxable income.
  • Investment income can be tax free if earned within an Individual Savings Account (or, ISA) and The ISA savings limit for cash investments now stands at a generous £20,000.
  • The first £2,000 of dividend income is not taxed.
  • Basic rate taxpayers pay no tax on savings interest of up to £1,000For individuals with taxable income of up to £17,570, their tax-free savings income may be higher.
  • If a room is let out in the taxpayer’s main home, they may be able to earn rental income of up to £7,500 without incurring any tax liability.

Example

Mary (whose husband works full time) earns £280 per week (£14,560 p.a.) from her part time job. She faithfully pays a tithe of 10% of her income into a Stewardship Gift Aid account. She has also authorised her employer to deduct 15% of earnings to be paid into her personal pension scheme. She has savings interest from a cash ISA and a bank savings account, as well as some good dividend income from shares left to her by her late father. How much tax will she pay in 2022/23?

 

  Weekly Average (£) Annual (£)
Earnings   280.00 14,560
Interest income from Mary’s ISA   2.50 130
Dividend income   16.23 844
Bank interest   0.50 26
Gross income   £299.23 £15,560
       
Pension contributions   42.00 2,184
Gift Aid donations   28.00 1,456
       
Net cash after pension contributions and gifts to charity   £229.23 £11,920

Gift Aid donations are deemed to be paid after Mary has ‘deducted’ basic rate tax, which is 25p for each £1 of donation made. It is 25p because the 20% basic rate of tax is calculated on the gross donation of £1.25 (£1 + the 25p tax).

The gross value of her Gift Aid donations (which is the tax-deductible amount) is £1,456 + £364 = £1,820. In other words, she has made Gift Aid donations of £1,820 but has ‘deducted’ £364 of tax and paid the balance, £1,456 to Stewardship. In signing her Gift Aid declaration to Stewardship, she has effectively said that she will have paid at least £364 in income tax and authorised us to reclaim that £364 from HMRC for charitable use.

But has she paid enough tax?

Let’s see…

 

 

 

Annual

Earnings

 

 

14,560

Add: ISA income

 Tax exempt

 

0

Add: Dividend income paid gross

 Under £2,000

 

0

Add: Bank interest paid gross

 Under £1,000 

 

0

Less: Pension contributions

 

 

2,184

Taxable earnings before personal allowance

 

 

£12,376

Personal allowance

 

 

12,570

Income subject to tax taxable earnings all within personal allowance

 

 

£Nil

 

 

 

 

Income tax at 20%

 

 

£0

 

 

 

 

Tax reconciliation:

 

 

 

Tax paid under PAYE

 

 

0.00

Tax deducted from Gift Aid donations, reclaimed by Stewardship     364.00

Shortfall in tax paid

 

 

£364.00

Mary earns £14,560 per year and additionally has investment income of £1,000. Her average weekly income is nearly £300 per week (£15,600 per year) and she reckons that with a personal allowance of £12,570, she has scope to make Gift Aid donations of over £3,000, well within her tithed amount of £1,456. But, it can be seen above that Mary has not paid any income tax at all and therefore, now owes HMRC £364.00 for the year.

Is that it?

Well, not necessarily. If Mary’s husband earns enough to ‘take on’ Mary’s giving under Gift Aid (in addition to any Gift Aid donations that he may make), he could do so, provided that he has made a Gift Aid declaration to Stewardship, has paid enough tax himself, and the donations already made by Mary are paid out of the bank account that also receives his income (for example, a joint account with Mary). At the same time, Mary should advise Stewardship that she has not paid enough tax and ask for her Gift Aid declaration to be cancelled from the appropriate date.

Alternatively, Mary could reduce her pension contributions and her Gift Aid donations in order to make sure that she has enough tax on her earnings to ‘cover’ the amount of tax that is reclaimed on her remaining Gift Aid donations.

Action Points

If your taxable income (taking account of any unearned income that is nevertheless taxable) is close to the level of the personal allowance, you should be considering if you have paid enough tax to support your Gift Aid donations, using the example above as a guide. If you pay PAYE tax, your payslip can give you an idea of how much tax you are paying. Bear in mind though that the tax on your payslip may not be the whole tax picture for the year and, if you are repaid some of it after the end of the year, this also needs to be taken into account in your Gift Aid calculation.

If you find that you haven’t paid enough, you should notify the charities that you have supported, immediately. They may be able and willing to adjust a future Gift Aid claim to repay any tax due on your behalf (but they are not obliged to do so in relation to donations already made, as it is your responsibility as donor to make up any shortfall). You can however ask them to claim a lower level of Gift Aid on future donations not yet made.

 

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Written by

Kevin Russell

Kevin is one of Stewardship’s leading team of technical experts with over 25 years of experience of helping churches and Christian charities maximise their potential. His expertise and knowledge is sought not only by charitable organisations but by Government, the Charity Commission and HMRC, helping to solve complex tax and charity law problems.

Prior to working for Stewardship, Kevin had a wide range of business, charity and teaching experience and is a qualified chartered accountant, and a chartered tax advisor. At PwC he was a Senior Tax Consultant assisting medium and large businesses in all aspects of their tax affairs. Also a lecturer in the Business School at Middlesex University and Principal of his own Chartered Accountancy practice.

Kevin is Vice Chair of the Charity Tax Group and Chair of CTG’s Gift Aid & Giving Technical Group. He represents the Christian church on HMRC’s Charity Tax Forum and advocate for the sector to Government, the Charity Commission and HMRC.

Currently a trustee of the UK arm of an international charity that inspires people to discover Jesus for themselves. Past roles include church deacon, trustee and auditor and he has helped set up two church plants.

Kevin and his wife Carol have 3 adult children and one grandchild.  They attend Grace Church, Highlands in North London.

Causes close to Kevin and Carol’s hearts are those working directly with the homeless, with drug addicts, and women in prostitution. Organisations working in evangelism amongst young people, in family life and demonstrating Christian love in action in the public sphere.

 

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