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Charitable donations – beware of creating a tax liability

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9 February 2016

There are changes ahead to the taxation of dividends and interest income which could have a knock on impact for some people who make gift aid payments to charities.

From  April 2016, tax credits on dividends will be abolished and replaced with a £5,000 dividend allowance. In addition, bank interest will be paid gross by banks and most will not be subject to tax on their interest income.

Individuals with low income, who regularly make charitable donations, and may have previously relied on the notional dividend tax credit and tax deducted at source from their bank interest to cover the gift aid element recovered by the charity, could now end up with a tax liability.

If you think you could be affected by this change you may want to consider whether to tick the gift aid box on donations made on or after 6 April 2016.  If you have not paid sufficient tax in the year to cover the gift aid donation then this may result in an income tax liability being due to HMRC.

In addition, for those affected who make regular donations by direct debit, you may need to contact the charity with an update to the change in your circumstances so that they do not continue to claim the gift aid from HMRC.