Query re 40% Tax / Benefit in Kind & Pension Impacts

20vt-rs

Hey guys,

I've been (I think) borderline 40% tax, what I'm trying to work out is if I am now in this band as a result of a recent pay rise. I want to work this out as I have a company car, and being 40% means I pay double tax on the car from being in 20%.

I also have a pension that is paid via salary sacrifice, I also want to know if it is possible to increase this contribution to bring me back into the 20% band, is this possible?

I know the tax banding info from the HMRC web site, but not sure how I need to exactly work out what I'm in. Is there any specific way of working this out by using my tax code, pay etc?

Hope someone has some pointers? Thanks in advance.

somethingcorporate

If you provide your salary and BIK values I am sure one of the regulars will be able to tell you.

don9999

Yes you can increase your pension contribution to reduce your taxable salary.

I have been doing this for a while, only recently increasing my contributions further for similar reasons.

Although increasing your contributions will reduce your take-home net salary, this is offset by a larger contribution to your pension (which is effectively increased by 40%).
There is also a small saving in NI contributions.
And in my case my employer also adds a small percentage to contributions I make.

So....small pain in lower net salary, but overall a big gain in total 'benefit'.

zagfles

http://www.hmrc.gov.uk/rates/it.htm

Just add the personal allowance to the basic rate band, ie 9440+32010=41450, if you earn above that you're in the 40% band.

Add your taxable income (ie P60), taxable value of benefits (P11D) and any other income (interest, dividends etc) and if it's more than 41450 you're in the 40% band.

20vt-rs

somethingcorporate wrote: »

If you provide your salary and BIK values I am sure one of the regulars will be able to tell you.

Ok cool thanks, I don't have the specific BIK values to hand but the salary is £40350 and tax code is 472L.

So this is my understanding but I could be wrong! :-

The tax rate of 40% is at £32011, add £4720 (472L) of my personal allowance which gives my 20% threshold up to £36731.

Currently including my salary sacrifice taken off my annual taxable income is £37120, does this mean I need to up my annual pension input by to £389 or more to bring me back into 20% tax band?

Am I on the right track here?

nomunnofun

Your salary is £37120 aafter salary sacrifice and your BIK is 4725 (coincidentally this is similar to your tax code) - making a total of 41845, £395 above the basic rate threshhold. You need to contribute £316 to a personal pension plan, which the HMRC will gross up to £395.

Remember though that you will only be paying 40% on the amount above the basic rate threshhold - only £190 per annum extra tax.

zagfles

20vt-rs wrote: »

Ok cool thanks, I don't have the specific BIK values to hand but the salary is £40350 and tax code is 472L.

So this is my understanding but I could be wrong! :-

The tax rate of 40% is at £32011, add £4720 (472L) of my personal allowance which gives my 20% threshold up to £36731.

Currently including my salary sacrifice taken off my annual taxable income is £37120, does this mean I need to up my annual pension input by to £389 or more to bring me back into 20% tax band?

Am I on the right track here?

Yes, assuming your tax code just consists of your personal allowance minus BIK (check your coding notice). Do you make any personal pension contributions or gift aid? If so you can claim extra tax relief on these. Though if you get any interest/dividends etc you'll need to pay extra tax.

20vt-rs

nomunnofun wrote: »

Your salary is £37120 aafter salary sacrifice and your BIK is 4725 (coincidentally this is similar to your tax code) - making a total of 41845, £395 above the basic rate threshhold. You need to contribute £316 to a personal pension plan, which the HMRC will gross up to £395.

Remember though that you will only be paying 40% on the amount above the basic rate threshhold - only £190 per annum extra tax.

Thanks that makes sense, Ok so now I understand the 40% is on everything over the threshold which in essence is fine. It's the company car that is a pain in the butt, because suddenly I'm (presumably) paying double what I was at 20% on it. Hence why I'd like to bring it back down into 20%. Checking online at 20% it's £74 per month and that will now mean £148 P/M?

So realistically, I should up my pension contribution by 1% (£403.50 P/A) and this will in effect bring my back into the 20% banding again and reduce my company car tax back down.

@ Zagfles questions - No gift aid or personal pension contribution is in place...

zygurat789

20vt-rs wrote: »

Thanks that makes sense, Ok so now I understand the 40% is on everything over the threshold which in essence is fine. It's the company car that is a pain in the butt, because suddenly I'm (presumably) paying double what I was at 20% on it. Hence why I'd like to bring it back down into 20%. Checking online at 20% it's £74 per month and that will now mean £148 P/M?

So realistically, I should up my pension contribution by 1% (£403.50 P/A) and this will in effect bring my back into the 20% banding again and reduce my company car tax back down.

@ Zagfles questions - No gift aid or personal pension contribution is in place...

Your BiK are added to your salary to arrive at total income on which you are taxed. If your total income including BiK (the car) is 41750 the you are in the 40% band but you will only pay 40% on the 300 above 41450.
So in no way can you be paying twice as much as the previous year for your car.

nomunnofun

20vt-rs wrote: »

Thanks that makes sense, Ok so now I understand the 40% is on everything over the threshold which in essence is fine. It's the company car that is a pain in the butt, because suddenly I'm (presumably) paying double what I was at 20% on it. Hence why I'd like to bring it back down into 20%. Checking online at 20% it's £74 per month and that will now mean £148 P/M?

So realistically, I should up my pension contribution by 1% (£403.50 P/A) and this will in effect bring my back into the 20% banding again and reduce my company car tax back down.

@ Zagfles questions - No gift aid or personal pension contribution is in place...

NO! Your benefit in kind value is taxed in the same way as your salary. It seems to be worth 4725 - 4330 will be taxed at 20%, 395 at 40% - an increase of £190 in tax over the whole year.

The extra tax is collected through your PAYE income - £190 per annum will be the extra tax deducted by your employer from your gross salary.

As zygurat789 says, this cannot equate to a 'doubling' of the tax on your car benefit.

20vt-rs

zygurat789 wrote: »

Your BiK are added to your salary to arrive at total income on which you are taxed. If your total income including BiK (the car) is 41750 the you are in the 40% band but you will only pay 40% on the 300 above 41450.
So in no way can you be paying twice as much as the previous year for your car.

This is probably another question then, at what point do the inland revenue know to tax our car at 40% instead of 20%? I am not great with this kind of thing, I know what I want to achieve (get to 20%) but not sure the best way to do it. At the mo it looks like increasing my pension contribution by 1% may get me there, does that sound right based on all of the above info?