As mentioned here, we wanted to give more information on the high earners restriction and it’s likely impact on charitable contribution.

High Earners Relief & Donations

Finance Act 2006 brought in a restriction aimed at High Earners for the tax year 2007 and subsequent years. High Earners Restriction limits the use of tax relief’s a tax payer can use to reduce their tax liability in any one year. This means they will have to pay an effective tax rate of 30% (effect from 1 January 2010) regardless of tax reliefs they may be eligible for.

How High Earners Restrictions Work

For the tax year 2010 individuals who have income greater than €125,000 and who are availing of certain tax incentives amounting to more than €80,000 will probably be affected by this relief. The maximum relief that can be claimed in 2010 is the greater of €80,000 or 20% of the individual’s income.

Example Restricted Reliefs:

There are 54 tax incentives called “specified reliefs” which must be considered when assessing if high earners restriction is applicable. The following are examples such as:

• Exempt Income – Patent Income, Artist Royalty, woodlands, stallions and greyhound stud fees.
• Relief on interest serviced on loans which were taken out to acquire an interest in a business.
• Property Incentives such as Section 23, urban, rural and resort area capital allowances.
• BES and Film Investments
• Charitable Donations to approved charities and certain sports bodies.

In this article we are focusing on the restriction put in place on charitable donations as a listed specified relief. In many cases, high earners, who in times gone by may have made a charitable donation, knowing they could claim tax relief at their marginal tax rate. This in some circumstances meant that the charity may receive a greater donation if the donor was focusing on the net cost to him/her after tax when deciding on the amount to contribute. However this tax relief may no longer be available if the donor is restricted by High Earners Restriction.

This can be set out by way of an example.

Relief Restrictions in Operation

Bob has an annual income from rental property of €250,000 in 2010. He also has hotel capital allowances of €100,000. Before the restriction was out in place Bob’s taxable income would have been as follows:

Gross Income €250,000
Less Specified Reliefs, as stated above €100,000
Taxable Income before restriction €150,000

However now that the restriction is put in place the following is the situation Bob is in:

Now Calculate Restriction:

Taxable Income before Restriction €150,000
Addback Specified Reliefs €100,000
Adjusted Income €250,000

As adjusted income is greater than €125,000 (the new threshold limit) and also specified reliefs is greater than €80,000, high earners restriction applies.

High Earner Restriction

Taxable Income before Restriction €150,000
Add (Reliefs €100,000 less €80,000 restriction) €20,000
New Taxable Income €170,000

Bob was considering making a charitable donation of €10,000 to an approved charity. Before when he made a donation he was aware that the net cost to him after claiming tax relief was €5,900. Now however as the limits have decreased and Charitable donations are also deemed specified reliefs, this donation will also be restricted. So taking Bob’s situation above, he already has reliefs to the value of €100,000 per year. As he can only claim €80,000 in any one year, the charitable donation will get no tax relief as the capital allowances are already restricted taking up the full €80,000 limit. This leaves Bob in a position where he must decide on paying €10,000 to the charity with no tax relief or only making a donation of €5,900 which is his after tax pay on a gross of €10,000. If his decision was the latter the charity will effectively lose out on an additional donation of €4,100.

In Summary

While it is just, that high earners are required to pay an effective tax rate of 30%, this article is trying to address the implications of charitable donations being listed as a specified relief and show how the Government may have hindered donations to charities. There is already restrictions in place that relief is limited if it is deemed that the donor is associated with a charity and this should really eliminate the people who trying to use this as a mechanism to avoid tax.

The Government have the opportunity to address this budget 2012

Note:
These figures are for illustrative purposes only and the high earners calculation is based on a simpler example of an individual with no ring fenced income and we have used hotel capital allowances as an example of one of many. In addition to this PAYE is the only tax taking into consideration for the above example. Also there is a list of all specified reliefs on the revenue website.