A: By this time of the year, many individuals will have submitted information to their agent to prepare a SATR for 23/24. Some clients will have an amount and mix of different types of income that lands in parts of the Income Tax landscape where the marginal rate is very high. These effects are driven by the taxpayer’s adjusted net income (S.58 ITA 2007).
An individual’s may reduce his or her adjusted net income by either: (i) making a personal contribution to a registered pension scheme where the scheme will treat it as made net of Basic Rate income tax that the scheme’s administrator will claim from HMRC; and / or (ii) making a donation to a UK charity under Gift Aid.
Usually, the tax year has ended before its income is known, ruling out making a pension contribution now to reduce 23/24’s adjusted net income. (It used to be possible to get relief in the prior year by a pension contribution made in the current year, but that legislation (S.641A ICTA 1988) hasn’t been around since April 2006).
However, it is possible to treat a donation made now as if it had been made in 23/24. When that is done, it has the effect not only of reducing the adjusted net income of 23/24 by the amount of donation grossed up for Basic Rate tax but it also expands the band for income that is taxable at Basic Rate by the same amount.
The tax saving would not equal the payment to the charity but it would provide a welcome reduction in the overall “cost” to the donor. For example, Alex had a High Income Child Benefit Charge in 23/24 that could be reduced using donations in this year; Mel had an exceptionally high bonus and resulting loss of personal allowance that could be ameliorated by getting relief in 23/24 for a substantial donation made in July this year.
Alan, a pensioner with quite a low income had CGT to pay on a buy-to-let property; he might benefit from using some of his regular donations in 24/25 as well as the donations throughout 23/24 to expand his 23/24 Basic Rate band to reduce his CGT bill.
The legislation for treating a donation made in one tax year as if it were made in the previous tax year is S.426 ITA 2007. Care needs to be exercised when using it. Here are the main pitfalls or obstacles to consider:
The election is made in respect of ‘a gift’; it is not possible to apportion a single payment to a charity between tax years. That shouldn’t be a problem if the client has, say, monthly payments to his or her favourite causes throughout the year, but it might be more of a challenge for someone who has made gifts annually or ad hoc.
The election in S.426(6) ITA requires that it is made in an original tax return. The opportunity for making the election and the donations on which it is to be based need to be identified as part of the process of preparing the original return. We do not have the luxury of claiming the benefit by amending the return.
The return must be filed by 31st January 2025 (whether returning electronically or on paper).
These time constraints do pose a bit of a challenge for getting information from client to agent but making a valid election can produce valuable tax savings even for client’s with fairly modest income. It might also be useful to enable a parent to reduce their adjusted net income to £100,000 in order to preserve his or her eligibility for tax-free childcare (Reg 15 SI 2015/448).
A taxpayer who is not in Self-Assessment might still want to elect under S.426 ITA. For example, someone required to make a CGT return within 60 days of completing the disposal of residential property might want to take advantage of the expansion of his or her Basic Rate band.
HMRC guidance (‘Getting tax relief sooner if you do not have to send a tax return’) indicates that it is possible to elect without needing to do a SATR. Whether the election may be made by telephone or must be in writing will depend on the amount donated.
