Company car tax questions

skemp1

Hello,

I wonder if you can help?

I am a bit confused by company car tax and how it works.

I am now in the 40% income tax bracket, I earn probably around £45k a year and am just about to take delivery of a new car that is a company car.

My question is about the tax on the car. I know I am in the 40% tax income bracket so I guess I have to pay the company car tax rate of 40% at some point.

Do I only pay the higher company car tax rate once my yearly earnings go over the 20% tax level to 40%? Or because I am in the 40% tax bracket do I have to pay the higher level of car tax if my overall yearly earnings exceed the 20% income tax threshold.

I hope this makes sense buts hard to explain!

Thanks for any help.

Regshoe

From what I can understand from your post you are asking do you only start paying tax on the car allowance at 40% once you hit the higher rate limit for the year (circa £42k, so likely just the last month or so of the year, depending on how you are paid), short answer: no!

You will pay tax at 40% on the entire benefit value, essentially the total income tax due is based on your annual earnings, but for employed people it is dealt with on a monthly basis on a cumulative basis, with a certain number of assumptions and corrections.

The way HMRC will handle the benefit is to change your tax code. This way you will essentially have more tax deducted each month from the same pay.


If you were to lose your job/take a pay cut/ or in some other way reduce your taxable earnings far enough below £41,450 such that the value of your pay plus benefits was still less than £41,450 then in theory the system catches up on a cumulative basis and you will end up paying tax at 20% on the benefits. Doesn't always work properly mind, which is why lots of people get rebates/demands after the end of the year.

skemp1

Maybe this explains it better:


Benefit in kind £5,718 £6,035
Tax payable at 20% £1,207
Tax payable at 40% £2,287

I am currently paying company car tax of £1207 a year or £100.5p a month because up until now I have been a 20% tax payer.

I am now a 40% tax payer so does this mean that instead of the car costing me the above it will suddenly jump to £2287 or £190.5p per month?

Caz3121

what is your tax code?
40% tax kicks in after you earn £32,011 on top of your allowance. BIK will normally reduce your tax code which means you fall into the 40% tax area on a lower income than the £41k

skemp1

My Tax code is 511L.

zygurat789

skemp1 wrote: »

My Tax code is 511L.

Normally 40% starts at 41450 (9440 + 32010)

However, in your case you will start paying 40% at 37120 (5110 + 32010)

Your BiK is an increase in salary but is taxed, for practicality, by reducing your code number, it amounts to the same thing. So you may pay tax on your BiK @20% or 40% or 45% or a combination of two of these.

nomunnofun

skemp1 wrote: »

My Tax code is 511L.

You state that your salary is £45k even before the addition of the company car.

The tax due will be 40& of the benefit which is either £2287 (on 5718) or £2414 (on 6035) - i do not understand why there are two figures.

So, for around £200 per month you have a company car, free insurance, tax, repairs and servicing. You should compare this with the situation where you did not have use of the car. Would the £200 tax saving compensate for using your own car?

opinions4u

Up your pension contributions to reduce 40% liability.