From 6 April 2016 the way dividend income is taxed is changing. The 10% tax credit will be abolished and instead each individual will have a flat rate dividend allowance of £5,000 (although this is not an outright exemption and the mechanics are rather complicated). The changes could leave some limited company owners with a significantly higher tax bill, and may also result in a tax hike for those that give to charity.
Individuals with predominantly dividend income who make Gift Aid donations may find themselves unintentionally penalised through the scrapping of the dividend tax credit.
Gift aid allows charities to claim the basic rate tax on every pound donated. So if you donated £100 to charity, they would receive at least £125, at no extra cost to you. However, as a donor you must have paid at least as much income tax and/or capital gains tax (at any rate) as the basic rate tax the charity will reclaim on your donation, for the tax year of the donation, or you will be liable to HMRC for the shortfall.
The current dividend tax credit can be used to discharge an individual donor’s requirement to account for the basic rate tax deducted from gift aid payments, however this will be abolished in April when the changes come into effect.
This means that whilst an individual currently in receipt of mainly dividends who makes Gift Aid donations has their basic rate tax taken care of, from April no such tax will have been paid and they could be pursued for the arrears.
This has gone largely unnoticed, but with the new dividends tax regime approaching and more details being published concerns are being raised that donors with little income other than dividends will lose out.
Under the new regime, dividend income up to the £5,000 Dividend Tax Allowance will be tax free. From April an individual will also have a personal allowance worth £11,000. Therefore, depending on their circumstances, a person could potentially earn up to £16,000 in 2016/17 and pay no tax. Any Gift Aid donations they make would then land them with a tax bill.
Donors caught by the change must ensure that they withdraw any Gift Aid declarations they have made. Charities should also update their guidance to donors before 6 April 2016 to make them aware of the changes.