Company car tax confusion 22% or 40% or both?

jsync

Hi,

I am due to replace my company car and I envisage going into the 40% tax bracket over the life of the car. My question is what happens when I reach the 40% threshold?

Is there someone that can clarify which of the following is correct?

1) I earn over 35k + car and get taxed 40% flat for the car
2) I earn over 35k + car and get taxed at 22% until I reach 40% threshold and then get taxed 40%
3) I earn over 35k + car and get taxed at an average of the 22% and 40% tax

Any help would be appreciated, thanks.

Bean_Counter

Probably nearer number 3.

The way it would work is that you get taxed at basic rate of 22% until your taxable income reaches £34,600 proportionally. Then at 40%. Taxable income is, in most cases, salary less personal allowances. As you already have a company car, then I am not going to make an assumption about what your personal allowance is.

Is it NOT the case that you go through the year at 22% then suddenly take a big in later in the year at 40%. The taxable benefit of your company car is reflected in your tax code. This means that you will be taxed at 22% / 40% as you go through the year. Hope that makes sense.

Your employer should complete a P46(CAR) and send this to HMRC at the end of the quarter when you change the car. This would enable a revised tax code to be issued and the correct tax collected.

If you are going into the 40% band, it might be worth looking at whether some of the benefit is actually worth it. For example, if you get private fuel provided, is the tax charge at 40% going to be more than the cost of the private fuel that you are saving?

jsync

Hi,

Thanks for the reply. Just to clarify further I do get fuel allowance and it is worth it as I use the car alot for personal milage.

So lets assume that for months 1-10 I am taxed at 22% which equates to £22 per month (for ease). In months 11-12 I get taxed 40% which is £40.

The total payable tax for the year in this example will be £300. Is it safe to assume that the the payable tax should be £300 / 12, which should be £25 per month.

Thanks

Bean_Counter

jsync wrote: »

Hi,

Thanks for the reply. Just to clarify further I do get fuel allowance and it is worth it as I use the car alot for personal milage.

So lets assume that for months 1-10 I am taxed at 22% which equates to £22 per month (for ease). In months 11-12 I get taxed 40% which is £40.

The total payable tax for the year in this example will be £300. Is it safe to assume that the the payable tax should be £300 / 12, which should be £25 per month.

Thanks

In principle yes. It never exactly works out that way depending on when tax codes are issued / changed etc, but it should be more or less like that.

If I were you, I would contact the payroll department at work and ask them "I am changing my company car - what impact will that have on my income tax?" It's a reasonable question to ask, and then they can do all the hard work of finding out P11D values, co2 emission details and factor that all in and give you an accurate figure.

Also if you slip a little into the 40% tax band, you may want to think about making an additional pension contribution if you can.

jsync

Excellent, that makes it clearer. I also found this useful:

http://www.sjdaccountancy.com/common/calculators/payroll.html

Bean_Counter

jsync wrote: »

Excellent, that makes it clearer. I also found this useful:

http://www.sjdaccountancy.com/common/calculators/payroll.html

Just be aware that some of the calculators can miss off such things as pension payments.

At the risk of stating the obvious, I would still ask what the tax implications of the new car are before you accept it.