income Tax: Gift Aid and Pension reliefs interaction

[HerbertViola]

In Tax Year 2016/17, Peter (35, single, blah) earns £11000 through employment, his only income. Correctly, no tax is deducted at source. He pays £2880 into his personal pension, and consequently the taxman contributes £720, adding £3600 to the personal pension in total. Peter also pays £800 to a charity and ticks the Gift Aid box, and consequently the taxman pays £200 to the charity as well.

It seems to be fairly commonly understood (at least around here) that the taxman would subsequently expect Peter to cough up £200 (but not the other £720), so I won't bother asking that question.

But what about Mary? Mary's situation is exactly like Peter's except that she earns £12000 in the year, and £200 tax is correctly deducted at source. She pays the £2880 into her personal pension and £800 to charity under Gift Aid, just like Peter. The taxman pays £720 into her personal pension and £200 to the charity.

Does the taxman chase Mary for any more money?

[swill453]

Interesting one. I'd guess she (or rather the charity) wasn't entitled to the Gift Aid. If she filled in a tax return at the end of the year there'd be no tax to pay, so with hindsight* she shouldn't have ticked the Gift Aid box.

* - because she might have made the pension contribution at the end of the tax year.

Scott.

[HerbertViola]

Thanks for replying.

This situation has arisen on a personal tax return that I am looking into (not yet submitted), though I have simplified the numbers to make the nub of the issue clearer. I'm not a professional.

HMRC's online system is certainly capable of asking for more tax if there isn't sufficient tax liability to cover Gift Aid, but in this case it is not doing so. And in a way, that does seem fair -- why shouldn't Mary get the same benefit of the £720 'freebie' as Peter? The only mention of the £3600 gross pension contribution in the calculation is the lifting of the Higher Rate threshold, not that the person in quesion is anywhere close to that. It isn't deducted from income before tax is applied. (Perhaps any excess over £3600 would be deducted.)

So HMRC's calculation seems to imply that Mary wouldn't need to pay any more, i.e. HMRC doesn't use the £200 she's already paid to part-fund her pension contribution tax relief, when Peter got it all for free.

But there's an article here which suggests that Mary would indeed have to pay more tax. hopefully it is wrong. (I should flag up the fact that in this case Mary made the personal pension gross through payroll, but would that make a difference?)
https://www.stewardship.org.uk/blog/blo ... -donations

Given that there is (limited) scope for applying current-year Gift-Aided donations to the prior year, this of more than academic interest.

[swill453]

why shouldn't Mary get the same benefit of the £720 'freebie' as Peter?

I'd say they're both entitled to the £720 'freebie', but neither are entitled to allow the charity to reclaim Gift Aid.

Scott.

[HerbertViola]

I think it's a bit confusing to talk in terms of the chariy's 'entitlement' to the Gift Aid, or Mary's entitlement to make the donation under Gift Aid.

Mary is entitled to 'tick the box' on the understanding that she will make up any shortfall in the tax she has paid in order to fund what the taxman consequently pays to the charity (which the chairty is certainly entitled to because they have Mary's Gift Aid declaration!). That's seems to be the way it works anyway, so that's what happened in my semi-fictional scenario.

the question remains: does HMRC need Mary to pay anything extra to HMRC beyond what was deducted by PAYE?

If (as you say you think) she is entitled to the same £720 'freebie' as Peter, then the £200 paid through PAYE should be sufficient, and there's nothing more to pay.

But is that true?

[swill453]

If (as you say you think) she is entitled to the same £720 'freebie' as Peter, then the £200 paid through PAYE should be sufficient, and there's nothing more to pay.

OK, maybe I'm backtracking a bit, in wording if not in effect. It's only a freebie if you don't have the income to cover the tax relief. So the £200 tax she paid "cancels out" £200 of the freebie.

Mary is entitled to 'tick the box' on the understanding that she will make up any shortfall in the tax she has paid in order to fund what the taxman consequently pays to the charity (which the chairty is certainly entitled to because they have Mary's Gift Aid declaration!). That's seems to be the way it works anyway, so that's what happened in my semi-fictional scenario.

If that's indeed how it works if there's a shortfall, then IMO she'd have to pay back the £200.

Scott.

[greygymsock]

i don't think Mary owes HMRC any tax in this situation.

for gift aid, there is a rule that income tax equal to at least the amount of tax the charity has reclaimed must have been paid by the donor (otherwise, the donor must pay the shortfall to HMRC).

for pension contributions, there is no such rule, AFAIK. there are various other rules instead.

perhaps the closest rule is that the gross value of pension contributions cannot exceed the higher of
a) the individual's taxable earnings in the same tax year
b) £3,600

(other rules include the annual allowance.)

[JonE]

... ticking the gift aid box on the donation form along the way, ...

Although there is no set format for a Gift Aid declaration there is usually some blurb along the lines of "I am a UK taxpayer and understand that if I pay less Income Tax and/or Capital Gains Tax than the amount of Gift Aid claimed on all my donations in that tax year it is my responsibility to pay any difference" or "You must pay an amount of Income Tax and/or Capital Gains Tax for each tax year (6 April one year to 5 April the next) that is at least equal to the amount of tax that the charity or Community Amateur Sports Club will reclaim on your gifts for that tax year."

The legal position is clear (as OP indicated). I wouldn't care to estimate the cost of any checking and enforcing of compliance or how much clawback could be achieved from individual taxpayers who have paid too little tax for all their donations to be properly gift aided. I suspect the cost/benefit analysis indicates that it's not worth throwing resources at this. Increasingly, there are those who actively seek to take advantage of the UK's charity structures and abuse the whole system for personal gain - on a significant scale! That would be a far more productive area for the application of scarce resources but I'm not convinced that the relevant parties have the legislative teeth or that the political will is sufficient.

I guess there are those who may just make the declaration recklessly or negligently but It seems a bit weird for an individual to want to donate to (unconnected) charities while simultaneously wilfully seeking to defraud the public purse. Perhaps HMRC relies on this to some degree.



Cheers!

[Dod1010]

Considering that even a non tax payer (and non earner as far as I am aware) is entitled to the £720 contribution from HMRC if he/she makes a £2880 contribution to a pension, I cannot see the difference between the position of Peter or Mary in that regard.

As for Gift Aid, there is no requirement for any charity to check that the ticker of the box on a Gift Aid form is a tax payer before claiming Gift Aid from HMRC. It is up to the person making the gift to ensure that he is paying enough tax to cover the amount the charity is going to get as a refund or, you might say, as an additional contribution from HMRC. I have often wondered if and how HMRC does reclaim any refund not covered by the amount of tax paid by the donor because I am quite close to that sometimes. My taxable income is quite modest as most of my income is sheltered in ISAs or a SIPP, and most of the rest (the State Pension) is covered by the Personal Allowance. The recent dividend tax changes that somewhat.,

In the example given therefore, Peter was a bit silly ticking the box if he is a non tax payer, but Mary's tax paid may just cover it. I am surprised though that either would have the means to make a charitable contribution anyway, but maybe, like me, they have substantial income form a tax sheltered source.

Dod

[JohnB]

I'm completing a SA form now for a year where I earned 9300, and paid 7400 into a SIPP, getting 1850 tax relief, total 9250.

I also got 3100 interest and 14200 dividends, so HMRC think I owe 550 tax on the dividends as allowances cover salary and pensions , which would cover the myriad of different Gift Aided subscriptions and church donation envelopes.

I've always found it odd you can put 100% of your salary into a pension, and get tax relief on it all, as you've not paid tax on the PA part, but so be it. But at least I've paid some tax, even if only at 7.5%, and as I expect no HRT refund can I honestly not complete the Gift Aid section, or do HMRC expect me to remember all the fiddly details. Putting in a nominal £500 in the Gift Aid section does not change the calculation.

Do people itemise, guess or omit their Gift Aid giving if it doesn't change the results?

[melonfool]

I'm completing a SA form now for a year where I earned 9300, and paid 7400 into a SIPP, getting 1850 tax relief, total 9250.

I also got 3100 interest and 14200 dividends, so HMRC think I owe 550 tax on the dividends as allowances cover salary and pensions , which would cover the myriad of different Gift Aided subscriptions and church donation envelopes.

I've always found it odd you can put 100% of your salary into a pension, and get tax relief on it all, as you've not paid tax on the PA part, but so be it. But at least I've paid some tax, even if only at 7.5%, and as I expect no HRT refund can I honestly not complete the Gift Aid section, or do HMRC expect me to remember all the fiddly details. Putting in a nominal £500 in the Gift Aid section does not change the calculation.

Do people itemise, guess or omit their Gift Aid giving if it doesn't change the results?

I don't list it if it doesn't change the result, to be honest. I only keep records in years where I will earn over the HRT (like this year, but I forgot to keep records!).

Mel

[melonfool]

My taxable income is quite modest as most of my income is sheltered in ISAs or a SIPP, and most of the rest (the State Pension) is covered by the Personal Allowance. The recent dividend tax changes that somewhat.,

Dod

Money coming out of a SIPP as pension is taxable.

Mel

[Dod1010]

My taxable income is quite modest as most of my income is sheltered in ISAs or a SIPP, and most of the rest (the State Pension) is covered by the Personal Allowance. The recent dividend tax changes that somewhat.,

Dod

Money coming out of a SIPP as pension is taxable.

Mel

Indeed and that is where most of taxable income arises. My first sentence was badly and inaccurately phrased. Sorry but it is sheltered as long as I do not draw on it.

Dod

[melonfool]

I did guess that Dod, but I don't like to leave misleading statements dangling around in case other people see them and try to rely on them.



Mel