Income tax/benefits...help!

Wamesy

Hi all,

I am a reasonably new person to these fine shores and i have just been offered a new job. Now my problems lie in that I dont really know what the tax and benefits levels are here in the UK. I do know that the basic tax and higher rate are 20%/40% respectively, and the cut off point is £37 400, it is just that my salary will be in and around this figure.
To make it even more interesting, there is the whole company car vs higher salary issue.

Now my questions are, will i earn more money (in my pay packet per month net) if i opt for a salary just under the higher tax cut off vs just over the mark? This seems to me to be quite a substanial amount of difference when we are talking about a difference of a couple of thousand £ to my salary.
And....taking into the fact that i am close to the higher mark, will it be better for me to take the company car or do i take an even higher salary and thus going into the higher tax bracket?

Any help would be greatly appreciated, as i am sure there is more to this than I am aware of.

chesky369

Only the amount OVER 37,400 is charged at 40%, the amount under is still charged at 20%, so no, you wouldn't be better off with a salary just underneath.

Wamesy

thanks for getting back to me. what i meant to say is that if i take a salary of say £37000, then i am just underneath, but if i take a salary at 38000 then i am i correct in saying that i am not better oiff at all as my monthly net wage would be far less off as the tax implications are significant

is this correct?

iamana1ias

chesky369 wrote: »

Only the amount OVER 37,400 is charged at 40%, the amount under is still charged at 20%, so no, you wouldn't be better off with a salary just underneath.

You need to add in the £6k+ tax free allowance too - 40% tax doesn't kick in till you're above £43,500 at least (but the company car will effect that)

Wamesy

ahaa...thanks iamana1ias

I didnt take this into consideration. So now i just need to work out what sort of financial gain the car will have as to what i need to do. Having looked quickly, i am guessing that a comapny car adds around £5000 or so.

Kimitatsu

MOVING THREADS FOR BETTER RESPONSES


Hi, Martin’s asked me to post this in these circumstances: I’ve asked Board Guides to move threads if they’ll receive a better response elsewhere(please see this rule) so this post/thread has been moved to another board, where it should get more replies. If you have any questions about this policy please email [EMAIL="abuse@moneysavingexpert.com"]abuse@moneysavingexpert.com[/EMAIL].

trevormax

ignoring the £6,475 tax free amount (to make it easier to understand), to answer your question, you would be better off to take the £38,000 wage as you would only pay 40% on the £600 over the £37,400 higher rate threshold.

As has been said by chesky, you still pay 20% on any earnings under the higher rate threshold. You only pay 40% on anything earned OVER the threshold of £37,400.

So (again ignoring the tax free allowance to make it easier to understand) job 1 has gross wages of £37,000. This all falls into the basic rate band of 20% so tax paid would be £7,400.

Job 2 has gross wages of £40,000. the first £37,400 falls into the basic rate band so is taxed at 20% = £7,480. The remaining amount of £2,600 (£40,000 - £37,400) is taxed at the higher rate 40% = £1,040. Total tax payable = £8,520.

So for an increase in gross pay of £3,000 you pay only £1,120 extra tax which is a net wage increase of £1,880.

But of course you need to take into account the tax free allowance and the effect a company car/increase in wages for the company car, would have.

If you know what company car you will be having then you should be able to work out how much your tax free allowance will be reduced by having the car and compare this to how much extra tax you would pay by having a wage increase or expenses.

btw, I have not included any calculations for NIC in the above which is something else you will need to consider.

John_Pierpoint

Don't forget National Insurance - that is a tax too.
Your employer may also have (almost) "compulsory" deductions too, say into a pension fund.