Salary sacrifice impact when you are just into 40% tax bracket

matty2767

Hi guys

I have a question I wondered if anyone could answer please?

I am just into the 40% tax bracket this year and i have option of taking a salary sacrifice car scheme.

I have seen the examples of cars for 20 and 40% taxpayers and although there is a tax saving at 40% it is offset with the less benefit of NI and increased BIK. So a 40% taxpayer pays more a month.

My query is, if I am just into 40% bracket then any sal sacrifice will bring me back into the 20% bracket. Should I therefore be looking at the cars from a 20% taxpayer's view or 40%.

Hope you understand what I mean

Thanks lot

grey_gym_sock

well, it depends how far you are into 40% tax ...

e.g. suppose the last £100 of your gross monthly salary is reaching 40% tax.

suppose you select a car for which you're charged £250 per month from your gross salary.

as it's a salary sacrifice, that saves you 40% income tax on the first £100, and 20% on the next £150, which makes £70 income tax saving.

the higher rate threshold is now just about aligned with the upper accrual point (where class 1 NI drops from 12% to 2%) ... well, it is unless you have other income besides your salary, or other taxable benefits - but let's ignore that for now ... so you also save 2% NI on the first £100 sacrificed, and 12% on the next £150. which makes £20 NI saving.

now suppose the car has a BIK value of £100 per month. with your salary sacrifice, you are now £100 below the higher rate threshold, so you only pay 20% on that £100, i.e. BIK is £20 per month. (but, if the BIK value were anything over £100, you'd pay 40% on the rest of it.)

so the net tax saving = £70 + £20 - £20 = £70.

and the net cost of the car is £250 - £70 = £180 per month.

if you're in exactly that position, then the car is actually cheaper for you than for either a basic rate or a higher rate tax payer. because a basic rate payer would have a net tax saving of:

£50 + £30 - £20 = £60

and a higher rate payer would have a net tax saving of:

£100 + £5 - £40 = £65

however, this won't work quite the same way if you have any other income (e.g. interest). you have to add that income in to see whether you save income tax at 40% or 20% or a mixture of the 2. while the NI saving only depends on your employment income.

e.g. if other income pushes you a little further into higher rate tax, the the income tax saved and BIK paid might all be at 40% ... but, if your salary alone is only just into higher rate, then you might still get NI saved at a mixture of 2% and 12%.

so you may be in a very good position for this kind of scheme. depending a bit on the exact figures.

matty2767

Wow thanks for that great response grey gym.

That's great

kidmugsy

grey_gym_sock wrote: »

if you're in exactly that position, then the car is actually cheaper for you than for either a basic rate or a higher rate tax payer.

fascinating, ggs. Could a higher rate tax payer put himself in that position by contributing the right amount into a pension?

grey_gym_sock

contributing to a salary sacrifice pension could do that.

a non-salary-sacrifice pension might not work as well - it could put you near the 20%/40% threshold, but leave you well above the 12%/2% NI threshold, so you'd only get 2% NI saving on the salary sacrifice car.

though it depends if you have non-salary income, too. it is ridiculous how many ways you can play with these figures ...