Carry back charitable contributions

Donations to charity over the course of a tax year can add up and taxpayers must ensure they keep a proper record of all donations to backup tax return entries. Donations that are made through the Gift Aid scheme allow for the recipient charity to claim 25p worth of tax relief on every pound donated. Higher rate and additional rate taxpayers are eligible to claim relief on the difference between the basic rate and their highest rate of tax.

For example:

If a taxpayer donates £500 to charity, the total value of the donation to the charity is £625. The taxpayer can claim additional tax back of:

  • £125 if they pay tax at the higher rate of 40% (£625 × 20%),
  • £156.25 if they pay tax at the additional rate of 45% (£625 × 20%) plus (£625 × 5%).

Planning opportunity

A higher rate or additional rate taxpayer who wants to reduce their tax bill for the last tax year could decide to make a gift to charity in the current tax year and then elect to carry back the charitable contribution to the previous year.

A request to carry back a qualifying donation made during the current tax year must be madebefore or at the same time as the self assessment tax return for 2017-18 is completed (i.e. before 31 January 2019).

Posted in HMRC notices

Carry back charitable contributions

Donations to charities are a recognised way to benefit charities and certain tax payers. To facilitate these advantages, taxpayers must ensure they keep a proper record of all donations to back up claims on their tax return.

Donations that are made through the Gift Aid scheme allow for the recipient charity to claim 25p worth of tax relief on every pound donated. Higher rate and additional rate taxpayers are eligible to claim relief on the difference between the basic rate and their highest rate of tax.

For example:

If a taxpayer donates £500 to charity, the total value of the donation to the charity is £625. The taxpayer can claim additional tax back of:

  • £125 if they pay tax at the higher rate of 40% (£625 × 20%),
  • £156.25 if they pay tax at the additional rate of 45% (£625 × 20%) plus (£625 × 5%).

A higher rate or additional rate taxpayer who wants to reduce their tax bill for 2016-17, the last tax year, could decide to make a gift to charity in the current tax year, 2017-18, and then elect to carry back the contribution to the previous year. A request to carry back the donation must be made before, or at the same time as, the 2016-17 Self Assessment return is filed. The deadline for filing a return is 31 October 2017, if you file a paper tax return, or 31 January 2018, if you file online.

Planning note:

This can be a useful strategy for higher rate taxpayers, especially those paying tax at excessive marginal rates. For example, a taxpayers’ personal allowance is gradually reduced by £1 for every £2 of income over £100,000 irrespective of age. This creates an effective marginal rate of tax of around 60% for taxpayers with annual income between £100,000 and £123,000.

Readers who find themselves in this situation should consider their options, please call to see if this carry back process would benefit your tax affairs.

Posted in Income Tax

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