Company car - benefit vs actual tax cost confusion

mrs_mcbunny

I recently got a promotion and on 1st December took delivery of a brand spanking new Alfa Romeo Gulietta. When I ordered the car the GE portal said that Benefit in Kind at 20% tax would be £38.40 per month which I felt was quite civilised. However I have recently had a letter from HMRC reducing my tax free allowance by the calculated benefit rather than the tax amount with the result that my tax free amount reduces by £2857 in tax year 2011-12. This is clearly a lot more than the level of additional tax I anticipated -I'm confused!

List price - 21980.01
Emissions - 114 gm Diesel
Fuel - No company contribution
My contribution - £46 per month (should this be offset against tax?)

When I check on HMRC website this computes as:
Car benefit - £2857
Car tax @ 20% - £571.40

So why is my tax free allowance reducing by £2857 rather than £571? There may be a perfectly simple explanation for this however I'm damned if i can see it :mad:

Thanks in advance for any useful help to follow!

BoGoF

Very simple explanation, by reducing your allowance by £2857 means they collect £2857 @ 20%, which is the desired result ?

NiceGuyEddie_2

mrs_mcbunny wrote: »

So why is my tax free allowance reducing by £2857 rather than £571? There may be a perfectly simple explanation for this however I'm damned if i can see it :mad:

Thanks in advance for any useful help to follow!

Because your tax free allowance doesn't represent tax.

Reducing it by £2,857 means that you get taxed at 20% of this (assuming you're a basic rate payer), ie you pay £571 tax on the BIK.

mrs_mcbunny

Ah, I think the penny may have dropped! It seems very simple when put so succinctly .

Do my monthly additional contributions count as "capital contributions" for tax purposes or does that simply refer to a cash lump sum added upfront (seems unlikely).

I'm a bit defensive with HMRC at the moment as I'm one of those on the border of the 40% tax band who is creeping ever closer with the reduced tax band being implemented in 2011-12.

BoGoF

Your monthly contributions are not 'capital contributions' but contributions for private use which should be deducted from the taxable benefit, so it looks like the figure in your tax code should be reduced by the amount you are paying

MarkyMarkD

Not if the monthly contributions are knocked off your taxable salary, because that way you are effectively getting tax relief and paying tax on the correct benefit.

BoGoF

Good point MarkyMarkD....

Check with your payroll Mrs McB

tillycat123

Remember also the £2,857 is added to your salary for working out the tax, so if you earn £40,000 you now earn £42,857 with the car if you are looking how close you are getting to 40%