From April 2019, the Welsh Government will be able to vary the rates of income tax paid by Welsh taxpayers (compared to English and Northern Irish taxpayers – the Scottish Parliament decides the income tax rates for Scottish taxpayers).  Income tax will continue to be collected by HMRC for Welsh taxpayers in the same way it is now. The personal allowance will continue to be the same as it is for the rest of the UK. The point at which people start to pay the higher and additional rates of income tax will stay the same as in England and Northern Ireland. Responsibility for taxing income from savings and dividends will remain with the UK Government.

The Welsh Government has published FAQs and a Memorandum of Understanding with HMRC.  HMRC has also produced draft legislation and a technical note setting out the government’s policy position in areas where the rate setting power interacts with other areas of the Income Tax system, including charitable giving. It confirms that in the event of different rates applying, Gift Aid for charities would continue to apply at the UK basic rate, regardless of the tax position of the donor (mirroring the approach taken in Scotland). See below for full details.

*UPDATE* The First Delegated Legislation Committee has approved the Devolved Income Tax Rates (Consequential Amendments) Order 2018. Read more here.

The current administration has committed to no increases before May 2021 and the next Assembly elections, but it is noted that the UK Government will keep this issue under review though so that, if the Welsh or Scottish and UK rates diverge considerably or it becomes possible to provide Gift Aid relief at the correct rate without the currently anticipated administrative burden, the position can be reconsidered.

Technical note: Clarifying the scope of the Welsh rates of Income Tax

Chapter 3 – Charitable Giving

When a taxpayer makes a voluntary donation to a charity through Gift Aid, the donation is made net of income tax at the basic rate, and the charity is able to claim repayment of that tax from HMRC (section 520(2) of ITA). For example, with a basic rate of 20 per cent, a gift of £100 is treated as a gift of £125 on which £25 tax has already been deducted. The charity is therefore able to reclaim the £25.

If the Welsh basic rate of income tax were higher than the UK basic rate, charities would benefit as they could claim back more tax in relation to donations made by Welsh taxpayers. Likewise, if the Welsh basic rate of income tax were lower than the UK basic rate, charities would lose out as they could claim back less in relation to donations made by Welsh taxpayers.

The UK Government has had an ongoing dialogue with charity representative bodies about the impact of having to identify donors liable at devolved rates of income tax in order to make accurate claims. The UK Government took account of those views when implementing the Scottish income tax powers, agreeing that the additional burden placed on charities would be disproportionate. It therefore decided that Gift Aid for charities would continue to apply at the UK basic rate, regardless of the tax position of the donor. This will also be the case for donors liable at the Welsh rates for the same reasons.

The UK Government will keep this issue under review though so that, if the Welsh or Scottish and UK rates diverge considerably or it becomes possible to provide Gift Aid relief at the correct rate without the currently anticipated administrative burden, the position can be reconsidered.

Donors who are higher and additional rate taxpayers are also able to claim tax relief on their donations. This relief is the difference between the higher/additional rate of tax and the basic rate of tax on the total ‘gross’ value of their donation to the charity. For example, if a higher rate taxpayer makes a £100 donation to a charity, the charity can claim Gift Aid at the basic rate, making the total value of the donation £125. The taxpayer can claim the difference between the higher rate of tax at 40 per cent and the basic rate of tax at 20 per cent on the total value of their donation, so they can claim 20 per cent of £125, a total of £25. Total tax paid, at 40 per cent on the £125 donation is £50, of which the charity can claim £25 and the donor can claim £25.

Once the Welsh rates are introduced, Welsh taxpayers will be able to claim relief equal to the difference between the UK basic and the highest Welsh rate of tax that applies to them.

So, whatever the Welsh rates might be, the total value of a donation of £100 by a Welsh taxpayer would be treated as £125. And a taxpayer who pays tax at above the UK basic rate would be able to claim the difference between their marginal rate of tax and the UK basic rate. So, for example, if the Welsh higher rate were 11 per cent, the Welsh taxpayer would then claim the difference between their higher rate (41 per cent) 8 and the UK basic rate (20 per cent) on the total valuation of the donation. This would be 21 per cent of £125, so a total of £26.25. Total tax paid, at 41 per cent on the £125 donation is £51.25, of which the charity can claim £25 and the donor can claim £26.25. 26. Tax relief for donations made to charity under the payroll giving scheme is given at source before an employee’s PAYE tax is calculated, and is given at their marginal rate. Where the employee’s marginal rate is derived from the Welsh rates of income tax then the relief will apply at that marginal rate.

Individuals who donate certain shares or land to a charity qualify for income tax relief (at the basic, higher and additional rates). All the tax relief has to be claimed through the Self Assessment return. The approach here will follow that taken for other donations to charities where relief is claimed through Self Assessment – therefore if an individual is a Welsh taxpayer they would receive relief at the Welsh rates.