how do gift aid donations affect ones PAYE tax code?

d63

hello, can someone help with this please?

i usually make a £500 donation to save the children each year, and in consequence the tax-free allowance on the PAYE notice gets increased by £750. but why?

note 2 on the PAYE letter is not at all helpful --

"Your donations to charity or to community amateur sports clubs (CASCs) are tax-free. As we expect you to pay some higher rate tax you will be entitled to relief on your donations to charity"

well ok, but does anyone know how they actually calculate this?

anselld

Are you sure you dont mean £600?

600 / 0.8 = 750

They just add the gross gift aid donation to your basic rate limit which makes no difference unless you are approaching or into the higher rate tax zone.

If you are in higher rate that has the effect of making the gift 40% tax free - 20% reclaimed by charity and 20% saved on your own tax.

d63

anselld wrote: »

Are you sure you dont mean £600?

600 / 0.8 = 750

.

well, there the nub!

several years ago when i didn't have the extra income to lift me out of the basic rate tax band, note 2 then read: "as we expect you to pay tax at 20% we have included £625 in your tax-free amount ..."
which seems perfectly reasonable for a £500 donation, so this £750 increase in the tax free allowance seems a little odd to say the least, but since it all evens out at the end of the year when i send in the self-assessment forms, i guess I am paying the correct amount, but it is a tad annoying all the same.

BoGoF

What is the gross amount of the PAYE source that the code is being used against?

d63

BoGoF wrote: »

What is the gross amount of the PAYE source that the code is being used against?

i am not entirely sure what you mean by the gross amount of the PAYE source, but the PAYE notice they've sent me for next year, 2019/20 has the following entries:

personal allowance - £12500
gift aid - £750
total - £13250
less state pension - £8201
total tax free amount - £5049

and then they just go on to say that the tax code will be 504L
and your total tax-free amount is used as follows:
MGM advantage life ltd (an annuity that pays out £6327 p.a) £5049 of this income is tax-free.

does that shed any light on matters?

BoGoF

d63 wrote: »

i am not entirely sure what you mean by the gross amount of the PAYE source, but the PAYE notice they've sent me for next year, 2019/20 has the following entries:

personal allowance - £12500
gift aid - £750
total - £13250
less state pension - £8201
total tax free amount - £5049

and then they just go on to say that the tax code will be 504L
and your total tax-free amount is used as follows:
MGM advantage life ltd (an annuity that pays out £6327 p.a) £5049 of this income is tax-free.

does that shed any light on matters?

Not really....

For the avoidance of doubt you have other income that takes you into the higher rate bracket?

From your 17/18 SA calculation how much was the basic rate band increased by for yout Gift Aid?

Dazed_and_confused

How and when did you notify HMRC you were paying £500?

Based on the tax code information you have supplied the £750 is saving you £150 in tax (MGM will deduct £150 less than they would otherwise have done).

To have a gift aid adjustment in your tax code means HMRC must think you are a higher rate payer so there must be other income you haven't mentioned so far.

A £500 donation would be £625 gross and if full higher rate relief was due that would only save you £125. As you are only paying basic rate tax with MGM then the tax code adjustment would be £625 (£625 x 20% = £125).

The most likely explanation is that HMRC are using £600, not £500, as their estimate of your gift aid.

This will mean you have to pay something back as part of your Self Assessment liability but it sounds like your tax code need updating to reflect the £500 donation, not £600.

d63

BoGoF wrote: »

Not really....

For the avoidance of doubt you have other income that takes you into the higher rate bracket?

From your 17/18 SA calculation how much was the basic rate band increased by for yout Gift Aid?

1. yes, i do indeed have some other income which takes me into the higher rate bracket

and

2. yes, on the SA302 calculation it says the basic rate band has been increased by £625 for gift aid payments.

so that part at least makes some sense.

d63

Dazed_and_confused wrote: »

How and when did you notify HMRC you were paying £500?

Based on the tax code information you have supplied the £750 is saving you £150 in tax (MGM will deduct £150 less than they would otherwise have done).

To have a gift aid adjustment in your tax code means HMRC must think you are a higher rate payer so there must be other income you haven't mentioned so far.

A £500 donation would be £625 gross and if full higher rate relief was due that would only save you £125. As you are only paying basic rate tax with MGM then the tax code adjustment would be £625 (£625 x 20% = £125).

The most likely explanation is that HMRC are using £600, not £500, as their estimate of your gift aid.

This will mean you have to pay something back as part of your Self Assessment liability but it sounds like your tax code need updating to reflect the £500 donation, not £600.

well, i do notify them each year in the charitable giving section about the £500, and since as I mentioned in previous reply to BoGoF the SA302 calculation seems to have increased the basic rate band by £650 as you have calculated, though goodness only knows why they should assume a figure of £600 for the PAYE code business.

another one of life's little mysteries i suppose

thank you both for your help anyway.

Dazed_and_confused

Why you have ended up in this situation then is anybody's guess but if you want to minimise the additional tax payable through your Self Assessment return you could always ask them to correct the gift aid amount to £500 (which should in turn result in a slightly reduced tax code and a touch more tax deducted during the year).

d63

Dazed_and_confused wrote: »

Why you have ended up in this situation then is anybody's guess but if you want to minimise the additional tax payable through your Self Assessment return you could always ask them to correct the gift aid amount to £500 (which should in turn result in a slightly reduced tax code and a touch more tax deducted during the year).

well, yes, i could do that i guess. but so long as it works out i am paying the correct amount of money each year, perhaps its best, at least where HMRC is concerned, to adopt as low a profile as possible and only speak to them if spoken to -- thoroughly nice fellows, one and all i am sure, but tasked with doing an unenviable job.