Amid all the coverage about the Budget 2016, it is easy to miss a potential trap arising from last year's Budget.
In summary, the current system of dividend tax credits will be replaced from April 2016 with a new tax-free dividend allowance, meaning the first £5,000 of dividend income will be tax-free. The tax-trap can arise because dividend tax credits under the current system can count towards the tax to cover the tax repaid on Gift Aid donations. The concern is that donors at either end of the wealth spectrum could get caught out, once they are no longer in receipt of the dividend tax credits, and find themselves liable for unexpected tax (which may also mean in some cases that HMRC may approach a charity and ask if they wish not to claim the Gift Aid relief).
The issue is explained in more detail in Richard Service's article on accountingweb.co.uk.
Charities should consider taking action now to alert donors of the risk.
There’s been minimal comment or publicity of what may be an unintended hit to charitable giving. Although it will be individual donors, not the charity, who will pay the penalty for falling into this new trap, it is incumbent on charities to make sure their donors are aware of the change, if nothing else to preserve donor goodwill.