Dividend tax changes – inform your donors

From 6 April 2016 the dividend tax credit will be abolished. At the moment, there is a 10% credit associated with dividends and this can be treated as tax paid when considering whether sufficient tax has been paid for a donor to make a Gift Aid declaration. When this credit disappears, donors can no longer take this into account.

Donors with low non-dividend income could be affected, for example pensioners whose pension income is below the new tax free dividend allowance of £5,000. These individuals will not pay any tax, whereas previously when they received dividends with a tax credit they were treated as having paid for Gift Aid purposes. Donors with very high dividend income but minimal other income also need to be careful. If they make large donations which reduce their taxable income they could find their tax bill increasing substantially to cover the tax withheld on the donations as the dividend credit will no longer be available to meet the Gift Aid requirements.

While the dividend tax reform takes effect on 6 April 2016, the entitlement to carry back Gift Aid payments made prior to filing the tax return will allow access to unused 2015/16 dividend tax credits. Affected donors should be informed quickly as once the 2015/16 tax return is filed it is not possible to claim the carry back by filing an amendment.

What happens if the tax paid doesn’t cover the Gift Aid reclaim?

Taxpayers who are required to file a tax return will have any uncovered tax collected through self assessment. The situation for those donors not currently within the self assessment system is more difficult. Strictly they should be notifying HMRC of their tax liability but most will not have an adviser and may not be aware of the impact of these dividend taxation changes.

Another point to note is that for enduring Gift Aid declarations it is up to the donor to withdraw the declaration. Whether HMRC will pursue donors remains to be seen, especially given that the individual amounts involved may be small.