I'm wondering if anyone can answer this question as I've looked high and low and cannot find a definitive answer.
Are UK individuals allowed to donate to UK charities from untaxed UK earnings to offset their personal tax liabilities?
Basically, if I earned commissions from referrals that I wished to pledge to registered charity (read DEC in this instance), could I simply donate the lot and not declare that income (or, declare it but offset it against the donation)?
I suspect not, as that's what gift-aid is there for, but it would be useful to know what the definitive answer is. I get the impression that companies have recently been allowed to do this to offset corporation tax but no mention is made of whether individuals can do this.
BTW...I know the proper way to effect such a donation would be to donate
78% of it and tick the gift aid box to allow the charity to gross it up to 100% but my question is very specific for a reason.
Unlike the USA and some other countries, you don't "deduct" your charitable contributions from income.
If you pay no UK taxes (e.g., you are a diplomat) you are not supposed to sign the attestation to the charity to allow them to recapture tax. If you do pay tax, it is irrelevant how much tax you pay or whether the funds you gift are, themselves, traceable to taxed earnings. At least that's how I've been handling it.
Just to be absolutely sure...is there anyone else out there who can corroborate (or refute) this position? - as they say, there's always safety in numbers ;-)
A trusted online reference stating the position unequivocably wrt individuals who donate untaxed earings and don't sign the gift-aid declaration would be absolutely fantastic, but having looked long and hard I suspect that it just doesn't exist. Inland Revenue advice only ever seems to speak of how gift aid is dealt with on the assumption that there's really no sane reason to do it any other way.
Basically in the US (and some other places) it's the donor who benefits (by deducting charitable giving from taxable income), while in the UK it's the charity who gains (by claiming tax paid by donor). From fiscal point of view it amounts to the same thing. For your purpose all you need to do is to declare your total income (including earnings from affiliated sites) and then, under Gift Aid payments (Question 15A.1 of Self-Assessment Tax Return) enter the amount you have given to Disaster Appeal (among other things). You should make a Gift Aid declaration (or click the box on DEC website). DEC will then be able to reclaim the tax. If you pay tax at higher rate of 40%, you will get extra tax relief, which you may then want to hand over to the charity. You are not allowed simply to deduct the charitable donation from your overall income. Only companies can do that for corporation tax.
There is no other tax-efficient way of charitable giving by individuals. If you donate to a charity without making a Gift Day declaration, the charity cannot reclaim your tax. If you deduct charitable giving from your gross income (on your tax return), you are committing an offence. You can only make a non-Gift Aid charitable donation from your taxed income. Alec
Thankyou to everyone who has responded thus far - it sounds unequivocal to me. From what I had read I had assumed this to be the case (i.e. Companies can do it for corporation tax purposes but not individuals) but I just wanted confirmation.
The reason I asked the question was because there are a number of forums that I frequent where some people are being urged to donate ALL their referral payments to DEC. While it's laudable in itself I'm aware that many probably aren't even aware that they should be declaring their referral earnings as taxable income through the self-assessment regime, let alone that by offering to give away ALL their referral earnings they may simply be creating a potentially unlimited tax liability somewhere down the line (if thousands of people choose take them up on their offer they could end up with a very large donation subsequently taxable at 28%).
Having posted a warning about this, it is possible that some people might mistakenly argue that just donating it without claiming it as part of gift aid would exhonerate them from paying tax on it. I just wanted to know my onions before the argument starts. Personally, whenever I choose to do such a thing I always make it clear that I will deduct basic rate tax from my income before passing it on to the charity via gift aid simply to cover my tax bill on the earnings that are likely to be falsely inflated purely because all the money is known to go to charity.
For the record (in case anyone is interested), I'm currently offering to donate ALL income earned from Amazon CDs, DVDs, games & books purchased using my affiliate links until 31 March to DEC.
However, a word of warning...For simplicity, I plan to simply take the Amazon commission payment received at the end of April, deduct basic rate tax, and donate it via gift-aid. So please be careful not to use my affiliate links to pre-order anything that isn't likely to be despatched by the end of March 2005 and hence, won't be included in Amazon's April payment (e.g. the new Harry Potter book).
Could you not ask whoever pays you the commissions to donate it instead of paying you?
Which would have exactly the same effect, income tax wise, as if you were able to donate from unearned income. You can claim further relief if you are a higher rate taxpayer or a pensioner with a higher allowance which is reduced by extra income.
I'm not sure about stuff like student loan repayments, tax credits & means tested benefits. I suspect the donated income won't reduce your assessed income for these.
What do you mean by "untaxed UK earnings"? If there is such a thing, i.e. UK earnings on which no tax is *due*, then you can do what you like with it and not tell anybody.
No.
Sort of, but you'd still need to use Gift Aid.
Would you care to disclose the reason?
You could donate 100% of it and still tick the gift aid box. This is OK provided you have paid tax on other income (or gains, I think) at least equal to the amount the charity will recover. There is no need for the tax being recovered to be directly linked to earnings from which the donation is funded.
Yes. But I think his concern is that by promising to donate 100% of earnings from referrals etc to charity, he could leave himself open to an unknown, potentially large, tax liability.
Spot on, that man. Especially if such offers are very popular and hence have the potential to earn a huge sum of money.
Not so much for me, as I've already decided to declare that basic rate tax will be deducted before the donation is made via gift aid. It's more for the many people I've seen jumping on the charitable bandwagon with
100% of their referral commissions who DON'T realise what they are letting themselves in for. I wanted to alert them to the danger but needed to confirm that there wasn't an alternative mechanism for them to cover themselves first.
BTW...on the issue of not specifically linking the donation to the tax due (in the sense that the donor only needs to have paid at least that amount of tax from ALL his earnings to be eligible to tick the box)...I take that to imply that the liability is still only 22% and not 28%. Am I right? The reason I ask is that grossing-up is used for calculating inheritance tax when you opt to cover the tax from gifts from within the remaining estate rather than from the donation so, why not with gift aid as well?
No. If you give an untaxed £78 to a charity which under Gift Aid reclaims the "missing" £22 from the tax man, the taxman will therefore need to be satisfied that £22 of tax has been paid by the donor, or will subsequently be demanded if not.
So for every £78 donated, you pay £22 tax, which is the same as saying for every £100 donated, you pay (approximately) £28.20 tax.
Not sure what you mean, but if you are a basic rate taxpayer, gift aid donations won't affect the tax *you* pay, and you'll be taxed on all your earnings as if you hadn't given anything to charity (except in the pensioner case I posted earlier).
If you earn 1000 from commissions and give 780 of it to charity, then you'll be taxed at 22% on 1000, costing you 220, so you'll break even (assuming you don't pay NI on such earnings). The charity will get 220 off the taxman so they'll get 1000 in total.
If you pay higher rate tax then that's no problem, you need to declare your gift aid donations on your tax return and the IR will extend your basic rate band by the grossed-up amount of your donation (divide by 0.78).
So in the above example, you'll get taxed at 40% on the 1000, costing you 400. But your basic rate band will get extended by your grossed up donation (780/0.78 = 1000), saving you 18% tax on 1000, ie 180. So you'll still break even.
Sorry...I probably didn't explain it well enough...
Having thought about it some more I've convinced myself of the answer anyway. Namely that, if I am firmly within the 22% tax bracket I will be expected to pay the normal 22% on any untaxed money that I've donated to charity via gift-aid...assuming that I have other earnings that have been taxed enough to cover the reclamation of tax by the charity.
Yes, always provided you're in the 22% tax bracket *including* the "untaxed" money. If you have a modest income plus £100k of this fancy commission money which you give away....
Aye, but he was thinking of not giving just £780 but all of it. So the charity will reclaim £282, which he must somehow have paid or pay.
Except that if he donates the whole £1000, not just £780, he'll be taxed at 40% of £1282, so needs to have paid £513, of which the charity gets £282, and the widening of his band will get him back the other £231. So the position is the same in both 22% and 40% cases - he needs to cough up £282 on top of his £1000.
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