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Gift Aid and High Tax Rate Dividend Income

Practical Issues
mearnsfool
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Gift Aid and High Tax Rate Dividend Income

#403320

Postby mearnsfool » April 10th, 2021, 10:45 pm

In this example I have entered these figures into the 2020 / 2021 Self assessment HMRC online system as a Scottish tax payer.

This this takes this anonymise tax payer in to 32.5% dividend tax rate due to the persons dividend income. Normal earnings are well below the Scottish tax level that is taxed at 41%. I have also included a gift aid amount of £254 net, £318 gross.

My confusion is the reason for figure used by HMRC to increase the £50,000 BR limit that is used to treat dividend earnings. It appears not to be logically linked to the Gift Aid amount.

Pay, Pensions, Profits
£37,654
Charitable giving £254 net, grossed up and rounded by the Self-Assessment return system used by HMRC to £318.

Tax on Pay, Pensions, Profits
Personal allowance £12,500 x 0% £0.00
Starter rate £2.085 x 19% £396.16
Basic rate £10,573 plus gross Gift aid
Add £ 318 from Gift aid
Adjusted Basic rate £10,891 x 20% £2,178.20
Intermediate rate £12,178 x21% £2,557.38
Sub total Pay pension and profit earnings £37,654, Tax Due £5,131.73

Company Dividend £13,463.00
The dividends are taxed at the UK tax rates but the Gift aid Gross rate still comes into play to an extent.

What the HMRC Self Assessment calculation shows is that £50,000 upper limit of the BR tax has £293 added to it, now we have an adjusted BR upper limit of £50,293.

Total Dividend £13,463

Basic rate at nil rate £2,000 at 0% £0.00
Basic rate at £10,639 x 7.5% £797.92
Higher rate £824 x 32.5% £267.80

Subtotal Dividends Awarded £13,463 Dividend Tax £1,065.73

Grand Total Income and Dividends £51,117 Tax Due £6,197.46

The issue I have with the HMRC self assessment system is that £318 is added to the Basic rate limit in the normal earnings section which gives £314 x £0.01 £3.14 in reduced tax of that £314 that would have been taxed at 21%.

While the Basic rate dividend tax limit is increased £293 and I cannot see a logical reason for the difference of £21 compared to the normal earnings area increase in tax relief. I must be missing something. Can anyone provide a calculation to link these two different allowances.

Thanks in advance if anyone can come up with a calculation.

mearnsfool
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Re: Gift Aid and High Tax Rate Dividend Income

#403324

Postby mearnsfool » April 10th, 2021, 11:05 pm

Minor Typo sorted.

While the Basic rate dividend tax limit is increased £293 and I cannot see a logical reason for the difference of £26 compared to the normal earnings area increase in tax relief. I must be missing something.

Can anyone provide a calculation to link these two different allowances.

genou
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Re: Gift Aid and High Tax Rate Dividend Income

#403415

Postby genou » April 11th, 2021, 3:08 pm

Plugging your numbers into the software I have, gives this ( can't work out getting the formatting better ) :



How I have worked out your Income Tax							
Your basic rate limit has been increased by £318 to £37,818 for Gift Aid payments.
Your Scottish basic rate limit has been increased by £318 to £37,818
This reduces the amount of income charged to higher rates of tax.
This ensures you receive additional relief on your contributions at your highest marginal rate.

Pay, pensions, profit etc.
Starter rate £2,085.00 x 19% = £396.15
Basic rate £10,891.00 x 20% = £2,178.20
Intermediate rate £12,178.00 x 21% = £2,557.38
Higher rate £0.00 x 41% = £0.00
Top rate £0.00 x 46% = £0.00

Savings interest received from a bank or building society, securities etc.
Starting rate £0.00 x 0% = £0.00
Basic rate band at nil rate £0.00 x 0% = £0.00
Basic rate £0.00 x 20% = £0.00
Higher rate band at nil rate £0.00 x 0% = £0.00
Higher rate £0.00 x 40% = £0.00
Additional rate £0.00 x 45% = £0.00

Dividends from companies etc.
Basic rate at nil rate £2,000.00 x 0% = £0.00
Basic rate £10,664.00 x 7.5% = £799.80
Higher rate at nil rate £0.00 x 0% = £0.00
Higher rate £799.00 x 32.5%= £259.67
Additional rate at nil rate £0.00 x 0% = £0.00
Additional rate £0.00 x 38.1%= £0.00
Total income on which tax has been charged £38,617.00

Income Tax due after allowances and reliefs £6,191.20

mearnsfool
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Re: Gift Aid and High Tax Rate Dividend Income

#403703

Postby mearnsfool » April 12th, 2021, 7:16 pm

Thanks Genou, it appears to be within a fiver of HMRC's number. Some times it is a case of that is near enough and get on with everyday living.

This is one of those times.

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Re: Gift Aid and High Tax Rate Dividend Income

#403728

Postby Gengulphus » April 12th, 2021, 8:38 pm

mearnsfool wrote:Thanks Genou, it appears to be within a fiver of HMRC's number. Some times it is a case of that is near enough and get on with everyday living.

This is one of those times.

Yes - basically an increase of £N to the basic-rate limit can normally only save you X% of £N, where X% is the difference between the highest tax rate you would be paying and basic rate. Since X% would generally be in the rough region of 20-25%, the difference you saw of £21 in the basic-rate limits would be expected to make a difference of around 20-25% of £21 to the tax payable, so about a fiver. It would however be interesting to know whether that difference scales up with the amount of Gift Aided donations - if those donations were ten times larger at £2,540, would the basic-rate limit difference and the tax difference also be ten times larger at around £210 and around £50 respectively? If so, the calculation you've encountered might no longer be 'near enough' for sufficiently large donations.

So this thread is probably an alert to any Scottish taxpayers who give highly generously to charity, about something they might want to watch out for.

Gengulphus

genou
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Re: Gift Aid and High Tax Rate Dividend Income

#403857

Postby genou » April 13th, 2021, 12:26 pm

Gengulphus wrote: It would however be interesting to know whether that difference scales up with the amount of Gift Aided donations - if those donations were ten times larger at £2,540, would the basic-rate limit difference and the tax difference also be ten times larger at around £210 and around £50 respectively? If so, the calculation you've encountered might no longer be 'near enough' for sufficiently large donations.

So this thread is probably an alert to any Scottish taxpayers who give highly generously to charity, about something they might want to watch out for.

Gengulphus


Changing the charitable donations to £2,540 and leaving all else the same I get - UK taxpayer £5890.52 in tax, Scottish taxpayer £5962.88, so £72.36 difference.

mearnsfool
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Re: Gift Aid and High Tax Rate Dividend Income

#403989

Postby mearnsfool » April 13th, 2021, 6:40 pm

I have not as yet submitted the tax return. I will do as you have done and report the results for a number of Gift Aid senarios from the tax calculation pages, both your chosen addition at £2,540 and a few others and report the results that the HMRC self assessment tax calculation produce produce.

Lootman
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Re: Gift Aid and High Tax Rate Dividend Income

#403991

Postby Lootman » April 13th, 2021, 6:50 pm

mearnsfool wrote:I have not as yet submitted the tax return. I will do as you have done and report the results for a number of Gift Aid senarios from the tax calculation pages, both your chosen addition at £2,540 and a few others and report the results that the HMRC self assessment tax calculation produce produce.

As an aside I have no idea why the Gift Aid system has been made so complicated. It actually puts me off making charitable contributions.

A much simpler way to have handled it would be to allow you to deduct the full value of your annual charitable contributions from your gross income before computing the tax. Two lines on the SA form and that would be it.

The only difference would be that the charity would not immediately and directly get any benefit from your tax savings. But if I were getting more tax relief for my contributions then I would donate more in the first place. I could mentally gross up the amount when giving.

scrumpyjack
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Re: Gift Aid and High Tax Rate Dividend Income

#404000

Postby scrumpyjack » April 13th, 2021, 7:32 pm

Lootman wrote:
mearnsfool wrote:I have not as yet submitted the tax return. I will do as you have done and report the results for a number of Gift Aid senarios from the tax calculation pages, both your chosen addition at £2,540 and a few others and report the results that the HMRC self assessment tax calculation produce produce.

As an aside I have no idea why the Gift Aid system has been made so complicated. It actually puts me off making charitable contributions.

A much simpler way to have handled it would be to allow you to deduct the full value of your annual charitable contributions from your gross income before computing the tax. Two lines on the SA form and that would be it.

The only difference would be that the charity would not immediately and directly get any benefit from your tax savings. But if I were getting more tax relief for my contributions then I would donate more in the first place. I could mentally gross up the amount when giving.


The problem with that is that most people do not need to submit a tax return as they are basic rate payers and all is dealt with via PAYE. The gift aid system means that for them no adjustment is needed to anything as a result of them making charitable donations. One used to be able to do it as you suggest but now I don't think the self assessment forms even cater for the situation where you make a charitable donation gross and not via gift aid. I made a substantial donation to a charity a couple of months ago and wanted to do it gross so the JustGiving websites didn't take their cut. It wasn't possible!

Lootman
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Re: Gift Aid and High Tax Rate Dividend Income

#404004

Postby Lootman » April 13th, 2021, 7:45 pm

scrumpyjack wrote:
Lootman wrote:
mearnsfool wrote:I have not as yet submitted the tax return. I will do as you have done and report the results for a number of Gift Aid senarios from the tax calculation pages, both your chosen addition at £2,540 and a few others and report the results that the HMRC self assessment tax calculation produce produce.

As an aside I have no idea why the Gift Aid system has been made so complicated. It actually puts me off making charitable contributions.

A much simpler way to have handled it would be to allow you to deduct the full value of your annual charitable contributions from your gross income before computing the tax. Two lines on the SA form and that would be it.

The only difference would be that the charity would not immediately and directly get any benefit from your tax savings. But if I were getting more tax relief for my contributions then I would donate more in the first place. I could mentally gross up the amount when giving.

The problem with that is that most people do not need to submit a tax return as they are basic rate payers and all is dealt with via PAYE. The gift aid system means that for them no adjustment is needed to anything as a result of them making charitable donations. One used to be able to do it as you suggest but now I don't think the self assessment forms even cater for the situation where you make a charitable donation gross and not via gift aid. I made a substantial donation to a charity a couple of months ago and wanted to do it gross so the JustGiving websites didn't take their cut. It wasn't possible!

Fair point about basic rate taxpayers and those who do not submit SA returns.

When you say "it wasn't possible" to make a gross donation to a charity without using Gift Aid, do you mean that the charity actually refused your cheque?

I thought that Gift Aid only applies if you are liable for UK income tax anyway. You declare on the form that you are a UK taxpayer. So I would have thought that the provision to donate by other means would have to be an option.

Personally I would prefer to make a donation and claim the tax back on my return, and not use GA at all. But as you suggest the SA return may no longer allow for that.

genou
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Re: Gift Aid and High Tax Rate Dividend Income

#404019

Postby genou » April 13th, 2021, 9:43 pm

Lootman wrote:Personally I would prefer to make a donation and claim the tax back on my return, and not use GA at all. But as you suggest the SA return may no longer allow for that.

We're wandering here, but the question on the return is "Gift Aid payments made in the year". The other side of the coin is that unless you explicitly make a GA payment ( by ticking the box or whatever ), the charity can't get HMRC to cough up the basic rate top up.

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Re: Gift Aid and High Tax Rate Dividend Income

#404023

Postby scrumpyjack » April 13th, 2021, 9:53 pm

genou wrote:
Lootman wrote:Personally I would prefer to make a donation and claim the tax back on my return, and not use GA at all. But as you suggest the SA return may no longer allow for that.

We're wandering here, but the question on the return is "Gift Aid payments made in the year". The other side of the coin is that unless you explicitly make a GA payment ( by ticking the box or whatever ), the charity can't get HMRC to cough up the basic rate top up.

I would have preferred to simply give the charity say 10k and enter that on my sa return to be relieved at my highest rate rather than give 8k and they have to claim BR back and I get an HR reduction. The return no longer seems to allow that

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Re: Gift Aid and High Tax Rate Dividend Income

#404165

Postby murraypaul » April 14th, 2021, 12:39 pm

scrumpyjack wrote:The problem with that is that most people do not need to submit a tax return as they are basic rate payers and all is dealt with via PAYE.

Not just basic rate payers.
I'm a higher rate tax payer, and have never needed to submit a UK tax return.
Most 'boring' people with a single employment will never need to submit a return.

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Re: Gift Aid and High Tax Rate Dividend Income

#404171

Postby scrumpyjack » April 14th, 2021, 12:58 pm

murraypaul wrote:
scrumpyjack wrote:The problem with that is that most people do not need to submit a tax return as they are basic rate payers and all is dealt with via PAYE.

Not just basic rate payers.
I'm a higher rate tax payer, and have never needed to submit a UK tax return.
Most 'boring' people with a single employment will never need to submit a return.


Yes but if you are a higher rate taxpayer and make a charitable donation, you won't get higher rate tax relief on the donation unless you do submit a tax return.

Your choice!

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Re: Gift Aid and High Tax Rate Dividend Income

#404208

Postby Charlottesquare » April 14th, 2021, 3:15 pm

scrumpyjack wrote:
murraypaul wrote:
scrumpyjack wrote:The problem with that is that most people do not need to submit a tax return as they are basic rate payers and all is dealt with via PAYE.

Not just basic rate payers.
I'm a higher rate tax payer, and have never needed to submit a UK tax return.
Most 'boring' people with a single employment will never need to submit a return.


Yes but if you are a higher rate taxpayer and make a charitable donation, you won't get higher rate tax relief on the donation unless you do submit a tax return.

Your choice!


And also no relief on any pension contributions which were not paid "before tax" via payroll. (And some other, less commonly claimed, reliefs)

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Re: Gift Aid and High Tax Rate Dividend Income

#405123

Postby quelquod » April 18th, 2021, 1:57 pm

scrumpyjack wrote:Yes but if you are a higher rate taxpayer and make a charitable donation, you won't get higher rate tax relief on the donation unless you do submit a tax return.

Your choice!


Oddly though my latest notice of income tax coding has an entry for higher rate tax relief on charitable donations (can’t remember the exact wording offhand but it relates to my church donations) although I’ve not submitted a tax return for years and in fact I’ve no idea how to do it without them sending me a form, so they must have calculated it from the church’s income tax refund claim.


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