Gift Aid affected by Dividend Tax Credit abolition

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From 6 April 2016 a tax hike will hit those who give to charity under Gift Aid, following new rules for dividends.

Individuals with predominantly dividend income who make Gift Aid donations could be unintentionally penalised through the scrapping of the Dividend Tax Credit. Before 6 April 2016, Gift Aid relief was available to those who paid enough tax to cover the basic rate on a grossed up donation (e.g. £20 UK tax for a cash donation of £80). Donations were treated as being made net of tax with the charity claiming back the tax. However, donors must have paid an equivalent amount in tax or they will be liable to HM Revenue & Customs for the shortfall.

The new dividend rules, introduced in April of this year mean that dividends no longer carry a tax credit. Whilst dividends now attract an additional 7.5% tax charge there a £5,000 Dividend Tax Allowance, so dividend income up to this limit will be tax free. Also from April an individual will have a personal allowance of £11,000.

This means that an individual can earn up to £16,000 in 2016/17 and pay no tax at all.

Those receiving large amounts in dividends but with minimal other income and who make sizeable Gift Aid donations, could find their tax bill increasing substantially to cover the tax being claimed back by the charities.

To avoid any unwanted tax bills, donors will need to make sure they withdraw any Gift Aid declarations already made. It is important that charities update their guidance to donors to reflect these changes.