New Scottish tax raises questions about low income charity donations

New lower-rate Scottish taxpayers could be required to pay out extra money to cover the tax relief currently received on their charitable donations. The news follows analysis by Edinburgh accountants Chiene + Tait of the Scottish tax bands which will come into effect this April.

The Scottish Government has introduced a new 19 per cent starter rate for lower level taxpayers in Scotland earning up to £13,850 per year. This offers modest earners a tax cut, but those who give to charity who end up paying less tax than is needed to cover any Gift Aid relief donations may soon be required to make up the shortfall with HMRC. Whilst this is not likely to exceed £20, it may erase any financial benefit from being on a lower tax rate in Scotland.

Chiene + Tait provided an example of a worker earning a modest annual salary £13K who was donating £74/month to a charity with Gift Aid contributions from this amounting to £888 per year. If this individual was based in other parts of the UK they would have paid sufficient tax to cover the Gift Aid donation. As a Scottish taxpayer, however, they would need to pay £3.50 more tax in order to cover their Gift Aid donation.

In another example, a Scottish taxpayer with pension income of £13,000 and ISA income of £900 per year who donates £900 to charities would be required to pay £6.50 to HMRC. In both cases, the shortfall resulting from a Gift Aided donation would virtually erase any financial benefit from being on a lower tax rate in Scotland.

Catriona Finnie of Chiene + Tait’s Charities and Education group, said: “By opting to include Gift Aid within any charity donations, taxpayers are essentially allowing HMRC to reallocate some of their tax to causes they support. However, if donors do not pay sufficient tax to cover this amount they are liable to HMRC for the shortfall.

“One potential consequence of the new Scottish tax bands is that lower-rate taxpayers who regularly give to charities may now owe HMRC extra money. While these may not amount to large sums of money, it may put people off making Gift Aid donations due to the level of complexity and the prospect of having to interact with HMRC.

“This raises concerns that some lower income charity donors could be deterred from making future Gift Aid donations. This could impact charities in a climate of ever-tightening finances.”

Ms Finnie added: “There’s no easy answer to this problem. Ideally, the Scottish Government should consult with HMRC about developing new Gift Aid relief rules for taxpayers north of the border; although such a move may cause further confusion.”