ACCA TX UK Syllabus B. Income Tax And Nic Liabilities - Gift aid donations - Notes 4 / 6
There are 3 tax benefits available for making personal gift aid donations:
Let's say that an individual makes a gift aid donation of £1,000
Pay net of 20%.
For example, if an individual want to make a gift aid donation of £1,000, he needs to pay 80% and HMRC will make the remaining 20% donation on his behalf.
Therefore, he will pay £800 and HMRC will pay £200 to the fund.
Increase the basic and higher rate bands by the gross gift aid donation.
Therefore, this same individual will increase his basic rate band to 37,700 + 1,000 = £38,700 and his higher rate band to 125,140 + 1,000 = £126,140.
This will result in an additional £1,000 being taxed at the lower rate of 20% instead of 40%, and an additional £1,000 being taxed at the higher rate of 40%, instead of 45%.
Gross gift aid donation are deducted from net income to arrive at adjusted net income.
Adjusted net income is used to determine the amount of personal allowance available. (Topic: Personal allowance)
Illustration:
Eli has a trading profit of £60,000 and he paid £2,400 to charity under the gift aid system.
Show the tax benefits of this donation.
Calculate Eli’s income tax liability.
Solution:
Benefit 1:
Eli paid £2,400 (80%)
HMRC paid £600 (20%)
Benefit 2:
Basic band extension: £37,700 + £3,000 = £40,700
Higher band extension: £125,140 + £3,000 = £128,140
Benefit 3:
Adjusted net income = £60,000 - £3,000 = £57,000
Income tax liability | |
---|---|
Total income | £60,000 |
Personal allowance | £(12,570) |
Taxable income | £47,430 |
£40,700 * 20% = | £8,140 |
(£47,430 - £40,700) = £6,730 * 40% = | £2,692 |
Total income tax liability | £10,832 |