ACCA Advanced Taxation (ATX) Practice Exam

What must be considered when making gift aid donations for taxpayers in the higher income tax margins?

1. Donations can only be made to national charities.

2. Gift aid does not impact the taxpayer’s net income.

3. Additional donations may help reduce adjusted net income.

4. It is not advisable for taxpayers above £125,140.

The correct answer is: Additional donations may help reduce adjusted net income.

When considering Gift Aid donations for taxpayers in the higher income tax brackets, it's essential to recognize that making additional donations can help reduce adjusted net income. This is particularly relevant for individuals whose income falls into higher tax bands. Gift Aid allows taxpayers to increase the value of their donations, as charities can claim back 25p for every £1 donated from HM Revenue and Customs. For higher-rate taxpayers, there's an added tax relief advantage. When they make a donation through Gift Aid, they can claim back the difference between the higher rate and the basic rate of tax on their self-assessment tax return. This effectively reduces their taxable income, which can be beneficial in managing their tax liabilities. Moreover, reducing adjusted net income is crucial for higher earners, especially as it relates to the calculation for certain allowances, such as the Personal Allowance, which gradually gets withdrawn for incomes over £100,000. Thus, strategic use of Gift Aid can serve as a method for mitigating tax exposure while supporting charitable causes. In terms of the other choices, it is relevant to note that donors are not limited to national charities, meaning the scope for donations is broader. Gift Aid can indeed affect net income by influencing taxable income levels, especially when higher-rate relief is