Salary sacrifice car scheme and tax credits

jajajo

Please help if you can!

I have spent the last week trying in vain to understand the full implications of a salary sacrifice car scheme available to me through my work
My main queries are the affect it will have on my tax code and my entitlement to tax credits
The details are

I earn £16271
Monthly amount of salary sacrifice has been quoted at £299.29 on a car value of £13640
The lease company has quoted a Benefit in Kind of £36.51 (co2 98, 14% BIK)
I have also been advised that this means I will save on tax and NIC as sacrifice is deducted from gross pay.
I really don't understand what all this will mean for my tax code, it is currently 944L, does anybody have an idea of what it will be with the BIK?
My other concern is tax credits, I am aware they will take the BIK into account but do the take my gross pay before or after the sacrifice? If it is after then I could be entitled to more tax credits! If anybody is in a similar scheme or can make sense of it all then I would appreciate some help. Is it a good deal? I am not in a position to pay a lump sum for a new car and my old Ford Ka is on its last legs

harrys_dad

This link may help http://www.hmrc.gov.uk/specialist/salary_sacrifice.pdf, and this one might too https://www.gov.uk/browse/benefits/tax-credits but I accept they are really complicated.

Maybe use one of the benefit calculators, such as http://www.turn2us.org.uk/benefits_search.aspx and see what effect the salary sacrifice will have, allowing for the fact that if you don't do it you will have to pay car costs a different way.

zagfles

jajajo wrote: »

Please help if you can!

I have spent the last week trying in vain to understand the full implications of a salary sacrifice car scheme available to me through my work
My main queries are the affect it will have on my tax code and my entitlement to tax credits
The details are

I earn £16271
Monthly amount of salary sacrifice has been quoted at £299.29 on a car value of £13640
The lease company has quoted a Benefit in Kind of £36.51 (co2 98, 14% BIK)

That doesn't make sense, is that the amount of tax you'll pay on the BIK? It can't be the BIK itself, which if it's 14% of 13640 should be £1909.60

I have also been advised that this means I will save on tax and NIC as sacrifice is deducted from gross pay.

Yes.

I really don't understand what all this will mean for my tax code, it is currently 944L, does anybody have an idea of what it will be with the BIK?

It'll go down with the BIK value, ie if it's £1910 they'll deduct that from your 9440 allowance giving 7530 so code of 753L. May be different first year as you'll only have the car for part of the tax year.

So you'll get taxed on £1910 more, but will save tax and NI on the £3591 you sacrificed.

My other concern is tax credits, I am aware they will take the BIK into account but do the take my gross pay before or after the sacrifice?

That's a good question. Tax credits are funny about salary sacrifice, as there are "notional income" rules. Some salary sacrifices they are happy with, such as pension, childcare, others they refer to their technical team and will want contract details, payslips etc. See http://www.hmrc.gov.uk/manuals/tcmanual/TCM0044060.htm

If it is after then I could be entitled to more tax credits! If anybody is in a similar scheme or can make sense of it all then I would appreciate some help. Is it a good deal? I am not in a position to pay a lump sum for a new car and my old Ford Ka is on its last legs

Depends on how tax credits see it. Ignoring tax credits, it doesn't really sound like a good deal, it'll cost you £2824 a year (3591.48 sacrifice, minus 430.92 NI saving, minus 336.30 tax saving) for what is presumably a small car. But I suppose it depends how much you pay for insurance etc.

If tax credits accept the sacrifice it'd lower your assessed income 1681 but in the first this this wouldn't increase your tax credits as there's a £2500 disregard for income drops. For future years it'd increase your tax credits about £680.

jajajo

Thanks for explaining the how it will affect my tax code, I wasn't sure how they came to the BIK amount either!
Here is the quote:

Your Quote Explained
The "Basic Monthly Cost"
Including the following:
Cost of your selected vehicle
Environmental Levy
Government Taxes, where applicable
£199.61


"Gross Monthly Cost" (the amount that will be sacrificed from your salary)
Includes the "Basic Monthly Cost"
The costs relating to Insurance
The cost of additional options
Government Taxes, where applicable
£299.27


"Net Cost To You†" (An estimate of the effect this may have on your disposable income)
Is based on the "Gross Monthly Cost"
Minus Indicative Income Tax on sacrifice £59.85
Minus Indicative Employee’s NI Contribution on Sacrifice £35.91
Plus Indicative Benefit In Kind Company Car Tax £36.51
£240.02

I know it seems like a crazy amount to spend but I need a car and I have no means of saving enough for a car that isn't another old banger, I'm trying to consider the fuel savings and tax, mot, servicing, insurance, breakdown and tyres are included.

Do you know how it shows on your P60? Does it give a gross salary before or after the sacrifice?

harrys_dad

The key item on a P60 is "taxable pay" which will be after the sacrifice as this is not taxable.

alia.1

The taxable benefit is based on the P11d value of the vehicle (referenced value of the car) £13,640 x 14% (company car (BIK) tax scale charge) = £1,909.60 (as per the above post) what this in reality means to you is your tax rate (20%) x £1,909.60 = £381.92 divided by 12 months = £31.83 per month. Therefore the tax & NI you will save (£95.76 per month less £31.83 per month Benefit in Kind) is £63.93 per month net saving in tax efficiency. The reason the BIK is quoted higher per month will be due to scale charges increasing year by year and therefore this is likely to have been averaged across the full 3 years. Totally understand that although it does seem like a lot of money in reality you are getting a brand new car with all the associated costs included (Insurance, Road fund licence, tyres, MOT, Roadside Assistance) no deposit and lots of benefits in respect of corporate finance rates & VAT efficiencies and as you quite rightly point out are likely to save at least a further £30 per month (on a relatively low mileage) in fuel efficiency alone. Running a vehicle you own can cost just as much especially if you take depreciation into account and with a salary sacrifice scheme you should enjoy a fully hand held support service from the provider.

Marlene53

Hello, did you find out the effect of salary sacrifice on tax credits. I have taken out a similar package like your and am wondering what I need to do next. I contacted HMRC but they seemed to have no idea!!

I would be very grateful for a response

Thankyou

KB348

Hi All
I am in similar situation and need advise please especially if you have been through the process.
Questions:
1. which gross will be used when calculating tax credits? before or after salary sacrifice?
2. how salary sacrifice is printed on payslips (as this might answer Q1).
3. PD11 calculations are very confusing? looks v difficult to make informed decision and once are in ........... then need to face for 3 years and by that I will have my 9 yrs No claim bonus in the bin.

My Figures:
Gross= £37000
Intending for high spec car so will be sacrificing around £5000, which will reduce my salary to £32K.
If Gross will be considered after salary sacrifice then I can claim £3K tax credit because I have 3 kids.

Please share your experience and advice.
Many thanks for your time.
Kindest regards.

zagfles

KB348 wrote: »

Hi All
I am in similar situation and need advise please especially if you have been through the process.
Questions:
1. which gross will be used when calculating tax credits? before or after salary sacrifice?
2. how salary sacrifice is printed on payslips (as this might answer Q1).
3. PD11 calculations are very confusing? looks v difficult to make informed decision and once are in ........... then need to face for 3 years and by that I will have my 9 yrs No claim bonus in the bin.

My Figures:
Gross= £37000
Intending for high spec car so will be sacrificing around £5000, which will reduce my salary to £32K.
If Gross will be considered after salary sacrifice then I can claim £3K tax credit because I have 3 kids.

Please share your experience and advice.
Many thanks for your time.
Kindest regards.

You won't get tax credits based on £32k because the P11D BIK value of the car will be added. Also see the HMRC manual link above.

KB348

Hi Zagfles
Thanks for your reply. Sorry I have posted in other thread as well. I have done some calculations
I am about to start a new job and struggling to make right decision to maximise my income & also to make sure I have enough for living.

Current situation:
Gross salary=38K
Three children under 7 yrs old.

What I am planning to do:
1-salary sacrifice for car lease (around 5K per year)
2-pension contribution
3-apply for tax credit

After research following is my understanding (please correct me if I am wrong):
38K(Gross)-5K(Salary Sacrifice)=33K;
Now Pension contributions (approx 3K) calculations will be based on 33K gross;
For Tax credit (which gross I should use 38K or 33K): If 33K then Income will be 33(gross)-3(pension)=30K+5K (Benefit In Kind)=so my tax credit will be based on 35K income and 3 children (approx=1800 per year)
plus I need to pay 20% tax on 5K BIK (which will be 1K)
Please advise what are the best steps under my circumstances.
Many thanks for your time and cooperation.
Kindest regards.

Icequeen99

KB348 wrote: »

Hi Zagfles
Thanks for your reply. Sorry I have posted in other thread as well. I have done some calculations
I am about to start a new job and struggling to make right decision to maximise my income & also to make sure I have enough for living.

Current situation:
Gross salary=38K
Three children under 7 yrs old.

What I am planning to do:
1-salary sacrifice for car lease (around 5K per year)
2-pension contribution
3-apply for tax credit

After research following is my understanding (please correct me if I am wrong):
38K(Gross)-5K(Salary Sacrifice)=33K;
Now Pension contributions (approx 3K) calculations will be based on 33K gross;
For Tax credit (which gross I should use 38K or 33K): If 33K then Income will be 33(gross)-3(pension)=30K+5K (Benefit In Kind)=so my tax credit will be based on 35K income and 3 children (approx=1800 per year)
plus I need to pay 20% tax on 5K BIK (which will be 1K)
Please advise what are the best steps under my circumstances.
Many thanks for your time and cooperation.
Kindest regards.

It depends on what your previous year income is. If it is higher than your expected income calculated above, then your tax credits may be based on a different amount. HMRC don't count the first 2,500 of any fall in income from one year to the next.

IQ