How Givers Can Gain (January 2010) |
Employee Benefits -> EB Article Library
The 2009 Budget introduced the Government’s proposal to restrict higher rate tax relief on pensions for anyone with income of £150,000 or more. The rules will change from 6 April 2011, but in the meantime the Government has introduced ‘anti-forestalling’ provisions. These are intended to stop excessive last minute funding before April 2011.
What is gift aid?
Most people are likely to have encountered gift aid on a ‘day out’ when visiting a zoo, museum or other attraction when their entrance fee is eligible for gift aid.
Gift aid increases the value of donations to UK charities and Community Amateur Sports Clubs (CASCs) by allowing basic rate tax relief to be claimed on the gift. Higher rate taxpayers can claim additional tax relief in their donations via self-assessment.
How it works
The amount of the qualifying donation is grossed up. So an £800 donation made under gift aid is worth £1,000 to the charity once the basic rate tax is reclaimed. If the donor is a higher rate tax payer, he or she can then claim a further 20% tax relief (another £200) in respect of the higher rate paid on the donation. This makes the effective cost of the donation £600 to the donor.
Why is it important in relation to pension planning?
The final step for calculating ‘relevant income’ under the anti-forestalling rules allows gift aid donations to be deducted. For example, for an £800 donation, £1000 could be deducted when calculating ‘relevant income’.
Potentially, donations which qualify for gift aid could reduce an individuals 'relevant income' below £150,000, meaning that he or she would be unaffected by the “anti-forestalling” rules.
This could mean an individual can make significantly larger pension contributions for the 2009/10 and 2010/11 tax years, still receive higher rate tax relief, but not have to pay a special annual allowance tax charge.
It should be noted that the assessment of 'relevant income' covers the current and previous 2 tax years. 'Relevant Income' would need to be less than £150,000 in all three years for the 'anti-forestalling' rules not to apply.
How to make a gift aid donation
A charity will normally ask an individual to sign a ‘gift aid declaration’ at the time a donation is made. This declaration may be worded to cover past and future donations too, so only needs to be made once for each charity.
How to carry back to previous tax year
A donation, subject to gift aid, can be backdated to a previous year if a nomination is made on the donor’s self assessment tax return for that year, i.e. before it is submitted to the HMRC by either the 31 October deadline for a paper return, or the 31 January deadline for an online return. HMRC Form P810 Tax Review can be used for those who do not submit a self assessment tax return.
Giving up to gain
A donation to charity using gift aid could mean the 'anti-forestalling' measures do not apply; the donor still receives higher rate tax on their pension contributions, but does not have to pay a special annual allowance tax charge.
As the donation will be given away by the client, an assessment will be required to understand the potential benefit the donation gives in the form of additional tax relief. This will depend on the level of pension contribution the individual intends to make that would otherwise be assessed under the 'anti-forestalling' measure. Additionally it will also depend on whether the individual is prepared to donate the amount required to make this strategy effective. For example:
Hector’s salary for the current tax year is £174,000, of which he intends to contribute in excess of £20,000 to his stakeholder pension. His earnings in the two years were less than £150,000.
At first, it appears that higher rate tax relief on his contributions will be limited by the anti-forestalling rules, as his relevant income in the current year seems to be £154,000 (taxable income less relievable pension contributions up to £20,000).
However, Hector uses gift aid to make regular annual donations of £4,000 per annum to a local charity which has a value of £5,000 once the charity claims back the basic rate tax.
Under the 'anti-forestalling' rules, the amount of £5,000 can be deducted from Hector’s income leaving him with relevant income of £149,000 and now free from the anti-forestalling measures.
Hector can also claim £1,000 higher rate tax relief on the donations, reducing the effective cost of his gift to £3,000.
It should be noted that this is a simplified example and does not include income that Hector might have from other sources, such as bank or building society deposit interest.
In some cases there may not be any advantage in making a charitable donation to reduce relevant income. This could be the case where relevant income in previous years exceeded £150,000 or where the cost involved exceeds the tax benefits. Of course, many individuals of a charitable nature make donations without thought for the effects on their tax position.
Anti-avoidance
HMRC can investigate and cancel the effect of any artificial device or strategy that claims to reduce or artificially deflate someone’s relevant income below the £150,000 threshold. Any planning in relation to relevant income should be carried out with the anti-avoidance provisions in mind.
Contact Cartlidge Morland to find out how we can help.
Demitrius Nurse
Partner - Employee Benefits
Email: employeebenefits@cartlidgemorland.co.uk
Call: 020 7709 5560
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