Unsure if 40% rate applies, childcare vouchers

turtlemoose · 24 November 2014 at 3:37PM

Hi all.

I've searched the forum and read many threads about childcare vouchers, but can't find the same situation as mine.

My income is as follows:

Salary: 29120
Car Allowance: 5100
Fuel Card: 2000 (estimate)
Rental income: 6209

I salary sacrifice 5% in to my employer's pension scheme (121 a month) and I also salary sacrifice 243 a month for childcare vouchers.

My tax code is 521L

I have been doing some overtime recently and have been concerned that if I tip in to being a 40% taxpayer then I will retrospectively not be entitled to the childcare vouchers that I have already claimed/bought.

I've tried to calculate my taxable income as follows (based on what I have read online) but am not sure if I have done this correctly:

Salary minus pension contributions = 27668 taxable
Car allowance minus non taxable payment for business mileage = 4200 taxable
Fuel card no non taxable aspect = 2000 taxable
Rental income minus mortgage interest and other deductions = 4421 taxable

Total taxable income for 2014/2015 = 38289

So ordinarily I am below the 41665 threshold and can claim the maximum £243 a month childcare vouchers.

However - my tax code is 521L as I am currently paying tax for last year's P11D (fuel card) and rental income so is it actually a case of it should work like this:

5210 = tax free
31665 = taxable at 20%
anything over 36875 taxable at 40% - meaning I am already over the threshold and not entitled to the vouchers I have already claimed this year.

Then I have the added income from my overtime, so far this is £2288 gross.

If my first calculation is correct this makes 40577 gross taxable income making me under the threshold still, however very close to it so need to be careful about future overtime causing me to go over it and triggering the loss of CCV. OR if my second calculation is correct, I'm already over the threshold, I retrospectively owe for the too many CCV, my future CCV entitlement is lowered, and my future wages payment should include the overtime being taxed at 40%.

I've gone round in circles trying to understand this, I really hope that someone more knowledgeable than me is around to help me understand this! Many thanks in advance.

TheCyclingProgrammer · 24 November 2014 at 3:42PM

Your childcare voucher eligibility is calculated at the beginning of the tax year when your employer does what is called a "basic earnings assessment". If your income changes during the tax year, your eligibility does not change until the beginning of the next tax year so you will continue to be eligible for childcare vouchers at the full amount and they will not be revoked retrospectively.

See page 7 of this HMRC document that outlines the changes that came in in 2011:

The Basic Earnings Assessment
When do employers have to carry out the basic earnings assessment?
If you join your employer’s scheme on or after 6th April 2011, your employer should carry out a basic earnings assessment when you first join the scheme and then annually at the start of the subsequent tax year. The assessment remains valid for the whole of the relevant tax year.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/367098/employee-qa2.pdf

turtlemoose · 24 November 2014 at 3:55PM

Great link, thank you.

That is a weight off my mind!

Does this mean I can now deduct 2916 from my overall taxable income?

Also, in relation to the 521L tax code, does this change where the 40% threshold falls?

I would rather pay a lump sum in to my pension instead of paying it in tax if that is the case.

jem16 · 24 November 2014 at 8:01PM

turtlemoose wrote: »

Great link, thank you.

That is a weight off my mind!

Does this mean I can now deduct 2916 from my overall taxable income?

Yes.

Also, in relation to the 521L tax code, does this change where the 40% threshold falls?

You've got two ways of doing this. Your tax code of 521L obviously takes into account your car benefit and gives you £5210 personal allowance as opposed to £10,000 personal allowance. So yes for you the 40% threshold lowers. However you don't include the £5100 car benefit in your total income if you do it this way.

Easiest way is to take your total gross income including car benefit and then deduct the full personal allowance as that's the way that HMRC would work it out. You would need to also include any gross savings interest in this total.

Then deduct any pension contributions and childcare vouchers and see if you are still above the higher rate threshold which is £31,865 this tax year.

from what you have given you are below this threshold.

Spidernick · 24 November 2014 at 9:40PM

Can you actually claim business mileage if you have a fuel card? Surely a fuel card benefit means you are effectively having all your fuel paid for, so then claiming relief for business mileage incurred is what the Americans would call a 'double dip', or am I missing something?

turtlemoose · 25 November 2014 at 1:48PM

Spidernick, I receive the fuel card for all business, home to work and personal mileage (capped personal mileage though) and this is considered an "other benefit" (box 15) on my P11D, so I pay tax on the cash value of it.

The mileage is coming from the car allowance - £5100 pa, so paid £425 a month which is subject to tax and student loan deductions (and I suspect NI but it's not clear from my payslip). For every business mile that I do, 45p of this £425 is paid to me tax free (and student loan free too).

Does that make more sense?

turtlemoose · 25 November 2014 at 1:51PM

jem16:

The 521L code is made up of paying for 13/14 rental income AND 13/14 P11D (which is the fuel card).

The car allowance is paid monthly in my normal wages and has tax, student loan etc deducted (or not, or partially) depending on how many business miles I have submitted for the previous month - this does not affect my tax code as the tax is taken each month for it through my normal deductions.

lovinituk · 25 November 2014 at 1:56PM

jem16 wrote: »

You've got two ways of doing this. Your tax code of 521L obviously takes into account your car benefit and gives you £5210 personal allowance as opposed to £10,000 personal allowance. So yes for you the 40% threshold lowers.

Does it? I would have thought it just means that he pays the 20% rate on more of his earnings (i.e. everything between £5120 and the higher rate threshold) - the 40% threshold still kicks in at the same level as everyone else.

jem16 · 26 November 2014 at 8:46PM

lovinituk wrote: »

Does it?

It does ,yes.

I would have thought it just means that he pays the 20% rate on more of his earnings (i.e. everything between £5120 and the higher rate threshold) - the 40% threshold still kicks in at the same level as everyone else.

Fraid not.

For most people on a standard 1000L tax code, the first £10,000 is tax free and the next £31,865 is charged at 20%. So it's only by earning £41,866 that you start paying 40% tax.

If your tax code is 512L you will only have £5120 tax free and the next £31,865 at 20%. So once you are earning £36,985 you will be paying 40% tax.

The taxable bands are still the same but because of the reduction in the tax-free band, the 40% band threshold arrives sooner.

turtlemoose · 28 November 2014 at 12:27PM

Jem, thanks for the further explanation.

The taxable bands are still the same but because of the reduction in the tax-free band, the 40% band threshold arrives sooner.

Your tax code of 521L obviously takes into account your car benefit and gives you £5210 personal allowance as opposed to £10,000 personal allowance. So yes for you the 40% threshold lowers. However you don't include the £5100 car benefit in your total income if you do it this way.

so for this year I don't count my rental income and fuel card because they're already being counted for last year??

I'm afraid I'm not sure which is the right way to do it.

If I do based on this:

If your tax code is 512L you will only have £5120 tax free and the next £31,865 at 20%. So once you are earning £36,985 you will be paying 40% tax.

then I am already at £37331 (taxable) income for the year due to overtime and therefore already in 40% band.

But if I do it like this:

Easiest way is to take your total gross income including car benefit and then deduct the full personal allowance as that's the way that HMRC would work it out. You would need to also include any gross savings interest in this total.

Then this would count me as NOT in 40% as my 37331 is below 41665.

Sorry if I'm being thick here :-/

jem16 · 28 November 2014 at 7:27PM

turtlemoose wrote: »

so for this year I don't count my rental income and fuel card because they're already being counted for last year??

Will you also have rental income and the fuel card this year? If so then you must include that when working out your total income.

If I do based on this:

then I am already at £37331 (taxable) income for the year due to overtime and therefore already in 40% band.

But if I do it like this:

Then this would count me as NOT in 40% as my 37331 is below 41665.

Sorry if I'm being thick here :-/

No you're not being thick - it can be difficult to get your head round it sometimes.

Basically the 512L tax code is including rental income and fuel card benefit so you would ignore that if using the £5120 personal allowance way of calculating.

However to be honest I find it easier (and also the way HMRC calculate it on tax returns) to add up all of your income (including expected rental income for this tax year), car allowance, fuel card benefit and any gross interest from savings or gross dividends from investments. That's your total taxable income as far as HMRC are concerned.

Then deduct any gross pension payments (possibly also childcare vouchers - not sure on that one) and your Personal Allowance of £10,000. You are entitled to that full £10k allowance - your tax code is merely a way of collecting tax and sometimes deductions are made from it to allow tax to be collected that wouldn't otherwise be collected. It doesn't mean you are only entitled to £5120 of personal allowance.

Then look at the amount you have left. If it's less than £31,865, tax will be charged at 20%. If more then deduct that £31,865 from it and that's what is chargeable at 40%.

Unsure if 40% rate applies, childcare vouchers

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