As you got no answer yet I will do my best to explain. My family use this system to give extra money to an over 65 parent. In my case I made covenant to pay 2500 p.a., I then notionally deduct tax at 20% i.e. 500 and pay the 2,000 to parent. Parent is not liable for tax so applies to revenue for refund of this tax, as the 2,500 I covenented is no longer considered my income I am not liable for tax on it either but as I paid the money from my net income after 41% then I can apply for the difference between the 20% (500) that I didnt give parent and the amount of tax I did pay 41% (1,025) and I get back 525. Works best if person making covenant is in 41% tax but even if you are not the parent still gets to claim back their portion. Make sure you do not push the parent over the tax exemption limit or there is no benefit as they wont be able to claim the tax back. Dont know what they are talking about on the 5% reduction, there is a limit of 5% on the amount of your own income you can convenent. Hope this is clear, we claim it at end of each tax year, just got cheque today for parent of 1,300 being 2007 claim on 3 covenents.
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