Help on Paye 40%

lamb_pie

I have only just found this forum and would appreciate some help on a tax problem I have.

My problem is that I do not want to fall into the 40% tax bracket because it will cost me an extra £800 pa because of my company car.

As i understand it my situation is as follows in 2006/2007 tax year Tax code 203L (503-281-19)
Salary £33,544
Car Benefit £2,808
Private Health Benefit £196
Total Taxable income £36,548

I believe the upper rate starts at 38,355 (£33,300+£5,035) which is the upper rate plus the tax free amount. I am therfore currently £1806 under the 40% tax band and pay 22%.

The problem is that there is a chance that my company will give me a £2000 bonus. This will put me into the upper rate tax band and I will loose £800 on my car so I will efectivey get around £500 from a £2000 bonus.

So my options are:
1) ask for a £1,805 bonus and keep me at 22%

2) Ask for it in may which will be the 2007/08 tax year whereby Mr Brown will probably increase the 40% limit by 900 to £34200 but I aslo get a pay rise which will eat the £900 extra and I am in the same boat.

3) Ask for £1000 (06/07 tax year) in March and £1000 in may (07/08 tax year)

4) Ask for the bonus to be paid into my pension which will not be taxed but I think taxible gross pay includes what you put into your pension even though you are not actually taxed on it.

4) Set up a salary sacrifice scheme at work for childcare vouchers. My wife currently does it on her part time salary for our 2 year old girl and it is exempt of tax and NIC but I am unsure if this will decrease my taxible pay.

Any help will be greatly appreciated

Regards

lambPie

WHA

Only the excess over the HR threshold will be taxed at 40% so on your figures, only £195 of the bonus will be taxed at 40%, the other £1805 will be taxed at basic rate. So your tax on the bonus will be £475.

If you got your bonus reduced to just £1805, you will still have £397 of income tax to pay on it (22%).

lamb_pie

It is not the tax on the bonus that concerns me it is the tax on my company car. This is not a marginal tax it is 100% at your highest tax band.

Therfore the tax currently on my car is approx
cash price of car £18,000 x 15% (Co2 146) X 22% My highest tax band which means I currently pay £594 pa in tax

on 40%
cash price of car £18,000 x 15% (Co2 146) X 40% My highest tax band which means I would pay £1080 pa in tax.

It would also affect my private health in the same way. You can have a £1 pay rise which pushes you into 40% and be £800 pa worse off a year because of this stupid rule.

ctm_2

lamb_pie wrote:

It is not the tax on the bonus that concerns me it is the tax on my company car. ... it is 100% at your highest tax band.

No it's not. The calculated benefit is treated as income and allocated to the tax bands just as your salary is, so WHA's calculations are correct.

lamb_pie

I think I understand. The think that was confusing me where the online calculators wherby it asks you what your top rate of tax is i.e 22% or 40% and then tells you how much you pay for your company car. I guess they assume a 40% tax payer is enough into the 40% bracket wherby all the company car benefit falls into 40% (i.e is over £38355) ant not the last £200 which will be in my case.

This has put my mind at ease. I may still try and get a appointment with my local tax office to make sure.

I may still look to use my salary to get the childcare vouchers as I will save even more if I go into 40% as they are exempt of NIC and Tax. We get £240 in childcare vouchers a month on my wifes NHS salary which save us around £45 per month.

They are a great way of saving money if anyone pays for childcare, website is http://www.busybeesvouchers.com/home/index.php

Thanks everyone for your help.

marie_hc

Hello lamb-pie

My husband had a company car for years.

How it was written on his assessment that they sent to us is as follows:

Salary £32,000.

purchase price of company car £15,600

Total Salary £47,600


Then minus your Tax allowance in full
and any thing alse that is tax
deductable just say £ 7,500

Total Taxable income £41,100


What the rate is now for the 10%
Then the next band up 22%
then the next band up 40%

this is how you pay your tax.

The car allownce is only what allownace they take of you to get the right amount of tax.

My hubby now leases his car through the company so were slighty better of but not much.

But the attitude was why give it to the gov. give the money to the workers and keep them in jobs.
By the way hubby was on something like minus 276 tax code before he changed.

If you earn over £30k you can do a self assessed tax.

Timmne

marie_hc wrote:

Hello lamb-pie

My husband had a company car for years.

How it was written on his assessment that they sent to us is as follows:

Salary £32,000.

purchase price of company car £15,600

Total Salary £47,600


Then minus your Tax allowance in full
and any thing alse that is tax
deductable just say £ 7,500

Total Taxable income £41,100


What the rate is now for the 10%
Then the next band up 22%
then the next band up 40%

this is how you pay your tax.

The car allownce is only what allownace they take of you to get the right amount of tax.

My hubby now leases his car through the company so were slighty better of but not much.

But the attitude was why give it to the gov. give the money to the workers and keep them in jobs.
By the way hubby was on something like minus 276 tax code before he changed.

If you earn over £30k you can do a self assessed tax.

I just want to add something to this if I may...

The way you're taxed on a car is based on the list price of the car, but only a percentage of it is added to your benefits. EG if the list price of the car is £15,600, you'd be taxed on a percentage of that, based on its CO2 emissions. It's a bit vague as I don't have my tax tables with me (saddo for even considering it) but it's not quite as harsh as taxing you on the whole thing each year.

All this is different however if your employer gave you £15,600 in the year in your pay for you to buy a car.

I don't understand the thing about self-assessing if you earn > £30,000? You can always do self assessment whoever you are but if you're employed you must be on the company's PAYE scheme. Self assessment in this case would be to purely check your employer's figures or to declare other earnings.

mor7s_2

The salary sacrifice point is an interesting one. At present your wife takes the vouchers and effectively saves 22% tax and 11% NIC on the equivalent of £55 per week.

If you find yourself heading fully into the 40% band in future and chose to take the vouchers from your employer you would be saving 40% tax and 1% NIC (very roughly) and thus reduce the net 'in your pocket' cost of the vouchers by a further 8%.

How much is your child's care and could further vouchers help? Is there any value in looking to each take up to £55 per week tax and NIC free from your respective employers and double the tax and NIC savings!

Do watch for how your employer treats salary sacrifice for other purposes though as it can affect SMP, SSP, death in service, overtime, bonus and pension contributions etc etc. These days many employers seek to link all these items to 'base pay' which is what your salary was prior to any sacrifice so they can stay unaffected.

lamb_pie

My applologies for my late reply. Marie, the Inland Revenue do not tax you on the full cost of your car they tax on a percentage based on the Co2 emmissions.

My situation is as follows:
Car List price £18000 Co2=145 therfore from the government tables I pay 15%
Therfore 15% x 18000 = £2700

Therfore the tax office say my company car is the same as £2700 in salary and therfore costs me £ 2700 x 22% £594 per year in tax

You then add £2700 on to your salary which is £34300 in my case to get £37000 at which I am taxed at 22%.

You can earn £33,000 +£5035 (tax free pay) = £38355 before paying 40%

Then anything over this is taxable at 40%.

I could not run/tax/insure a £18k car for less than £2700 per year so I would rather have the car. If they ever took my car off me I would need £5-£6 k to make it worth my while.

The key to company car's to to get one with a very low Co2 and if it is diesel Euro 4 complience. You do not have to go for a small car mine is a 2.2 saloon.


I agree with you more7s about implications about pension etc for the salary sacrifice scheme, I will probably wait until (hopefully) one day I am properly in 40% before looking at it. It can also have a big inpact on working tax credit if you get it which we do not and you can be worse off.