Salary Sacrifice car scheme help

wrighty993

Hi All,


First message on here but I need some advice, I am due to give my company car back in April and have been told I will now receive a payment instead. They have setup a salary sacrifice scheme with a company I can use or I can lease a car myself. I am currently looking into the costs around salary sacrifice, perhaps I am reading to much into it and have confused myself. Does anyone know how it works? All my calculations leave me better off a month when working out my take home pay which makes me doubt myself and ask the question Why would they do something to make me better off each month?


As an example (not my real earnings but this will work just as well anyway):


Pay before tax 42k
Car allowance £425 a month totalling 5.1k a year making earnings 47.1k a year before tax.


Using the car company we are using I have picked a car as follows (this is a quote)


40% Tax Payer
Monthly Gross Salary Sacrifice: £687.86
National Insurance Saved on Salary: (£13.76)
Tax Saved on Salary: (£275.15)
Monthly BIK: £246.45
Effective Net Monthly Cost: £645.40


Assuming my Tax allowance is £11000 (as this is what it will be come april) how do I work out my take home pay? Using a calculator online it shows the following?


Gross Income £47,100.00 £3,925.00
Pension Deductions £0.00 £0.00
Childcare Vouchers £0.00 £0.00
Salary Sacrifice £7,744.80 £645.40
Taxable Benefits £0.00 £0.00
Pre-tax deductions £0.00 £0.00
Taxable Income £28,750.20 £2,395.85
Tax £5,750.04 £479.17
National Insurance £3,755.42 £312.95
Student Loan £0.00 £0.00
Post-tax deductions £0.00 £0.00
Take Home £29,849.74 £2,487.48


Is this correct? When using a salary sacrifice I understand the total for the year is removed from the Gross annual salary but does my tax code change at all as it does now with a company car? I would like the calculation to make complete sense to me so I can work out my take home pay, what I can not afford is to be worse off at the moment.


Any help and advice would be much appreciated.

bigjl

What is the point using example figures that arbor your actual wages?

And it depends what car you lease.

As then any advice will be tainted.

MSE advice would be to buy a 2/3 yr old car similar to the company car that has gone back and pocket the money they give you to sort your car out.

JayCartwright

bigjl wrote: »

What is the point using example figures that arbor your actual wages?

And it depends what car you lease.

As then any advice will be tainted.

MSE advice would be to buy a 2/3 yr old car similar to the company car that has gone back and pocket the money they give you to sort your car out.

Good advice, providing his company allows him to run an older car. My mates company stated any car instead of a company car can be no older than four years.

wrighty993

Hi,


That means me having a half decent deposit which I currently do not have and as Jay advised I still need to follow the company car policy which is a car no older than 4 years. What I am trying to ascertain is how does it work or if in fact I am missing something? I appear to be better off by a couple of hundred pound at the moment which makes me mistrust it. (when has a company or government saved me money?)


I get the part that the figure I provided of 645 is removed from the salary before tax/NI however is that it? or does my tax code change also like it does at the moment with my company car?


The net salary discount is 645 but the BIK is 246, I assume the net salary effective cost includes the BIK also. The next step is call up HMRC but I don't want to sit on the phone for an hour in a queue.

nearlyrich

You will easily spend the extra on tax insurance tyres etc...

wrighty993

I haven't owned a car in 10 years, I don't plan on buying one. If I don't take up the salary sacrifice option then it would be a car lease and ultimately that will cost me more. The salary sacrifice is looking ideal at the moment unless I am missing something with my calculations, its why I am here. Hoping to draw on someone else knowledge of the tax implications to such a scheme.

daveyjp

It works exactly the same as your pension, although you have 0% in your figures, I hope this isn't the case.

Payments are taken off your gross salary, you pay tax and NI on the balance after sacrifice deductions.

Tax code shouldn't change as it isn't a taxable benefit. It will still be £11,000 less any other taxable benefits you may get such as healthcare etc.

Companies like it as it reduces their NI contributions, but there are downsides to you and these should be explained by your company.

wrighty993

Davey,


Than you for the reply, this make sense then. I doubted it because I came out with more money than I expected, my pension is not 0% so don't worry I just didn't include that.


Another question, I am in the 40% tax bracket at the moment. With this sacrifice it could take me below it after my personal allowance is removed. Is this correct? or would I still pay 40% on part of it?


Thanks again


Antony

thescouselander

bigjl wrote: »

What is the point using example figures that arbor your actual wages?

And it depends what car you lease.

As then any advice will be tainted.

MSE advice would be to buy a 2/3 yr old car similar to the company car that has gone back and pocket the money they give you to sort your car out.

That's not really money saving if the OP wants a new car.

bowlhead99

Getting a car IS a taxable benefit that consumes some of your personal allowance but it is not a NI'able benefit because it's not cash.

The gross-to-net online salary calculators can be a bit confusing to use. And also the basic quote you got from the car company assumed you were on a 40% tax bracket. Actually if you are giving up over £8k a year from a £47k salary and allowance package, you would drop out of the 40% tax bracket which only applies to people earning over £43k. But then the fact you got a benefit of a valuable car with a BIK value of thousands a year, means you would get dragged back up into the high rate bracket again and it is fine to go with their assumption of 40% tax...

With your sample numbers you are on the borderline of paying low or high rate tax. The fact you are trying to give us numbers which are not your real salary to throw us off the scent of what you really earn means you are at risk of confusing things, especially as the threshold for high rate tax is £43k. If you really earned 3.5k less than your fake £47k pay-and-allowance number, then you would be only just into high rate tax, so your sacrifice would drop you out of high rate tax and you BIK benefit would not be quite enough to bring you back in. It would be a bit messy.

Try to keep things simple. If you just try to use one of the many net pay calculators in plain vanilla mode, the gross total you were going to get paid including car allowance was £47.1k; you would be on a £34.64k take-home as standard for that level of income, using current year 2015/16 tax rates. I'm not bothering to recalculate with next year tax rates because theres only a few hundred quid in it over the entire year, and the change in annual allowance affects the 'before' and 'after' just the same.

So, a £34.64k take-home if you buy and run your own car.

Then the information from the car tax company says you'll be spending ~£645 a month from your net pay to get the car (because they say it will cost you £688 from gross pay, which means you will save £275 of salary tax and £14 of NI but then pay £246 of BIK tax). So the £645 x 12 (£7.74k) reduction to your take-home, off your standard £34.64k a year take-home, leaves you with £26.9k takehome. By choosing to have them give you a shiny new car, you would stop taking home about 2890 a month after all taxes, and instead take home more like 2240.

The annual tax bands are not changing very much next year so your 2016/17 take home will be similar. But basically the net monthly cost for most high rate taxpayers is roughly the £645 the car company told you.

If you want to run all the numbers separately for your ACTUAL salary numbers you need to feed the online calculators with gross income and deductions and they can work it out for you.

The car tax company gave you the example that taking a salary sacrifice of £688 a month would save you £275 of salary tax (at 40%) and £14 of NI (at 2%). They also said you'd be paying £246 of tax on the benefit in kind. As the £246 is also assuming you're a 40% tax payer, the gross benefit in kind is (246/0.4 = ) £615 a month or £7380 a year.

So if you want to go and run all the numbers in detail, what you need to tell the salary calculators is that your gross pay is £47100 a year but you are considering sacrificing £8256 a year (688 a month) off your gross pay and then taking on a benefit in kind worth £7380 a year (615 a month)

I mentioned above that your 'not my real salary' numbers were reasonably close to the borderline of high rate tax. So the £8256 sacrifice would drop you back down to basic tax but then the extra £7380 benefit in kind would take you back up to it again. The net effect is that you save some taxable income at 40%.

Unfortunately the effect is not quite so simple with national insurance. A quirk of getting a car instead of cash is that you save NI on the cash you're not getting paid, but you don't pay NI on the car you get. The car company in calculating the NI saving for you assumed £14 a month because most high taxpayers pay 2% national insurance. However, on cash salary of under £42,380 a year, people pay 12% national insurance. In taking a salary cut of £8256 a year you will therefore save some NI at 2% but you'll also save some NI at a much nicer 12%.

So having told you before that your takehome would drop from around £34,640 to about £26900, based on the assumption that the car was costing you just over £7.7k a year, it won't be quite as bad as that, because the NI saving is a bit better because of dropping through the threshold and starting to save some NI at 12%. Your revised net pay would really be a bit over £27200 (using 2015/16 rates) instead of the £26900 that I mentioned above.

Feed your real numbers into a net salary calculator if you need the real numbers. But don't do what you did in your example and feed in £645 a month as your net benefit in kind. That was the car company's guesstimate of the net cost after tax and NI savings. For an online calculator you need the GROSS amount sacrificed (£688/mth) and the GROSS amount of the benefit in kind which would be assigned to you for using the car (615/mth).

wrighty993 wrote: »

I doubted it because I came out with more money than I expected,

You got more than you expected because you put the NET deduction to your salary that the car company expected you to suffer, in as a GROSS salary sacrifice. The calculator then reduced your tax and NI assuming this was a gross cost. But actually it was a net cost. You are giving up over £600 per month of NET money. But if you tell the calculator you are giving up over £600 of gross money and don't also tell them you are taking on a new benefit in kind which is taxable, it will get in a mess.

Bottom line, your salary calculator said you would get a net pay of almost £30k a year but my figures say more like a little over £27k. Though it's nice to save a little national insurance for you and the company, the amount of tax you pay on the benefit is similar to the amount of tax you save on not taking the cash. So if the headline price of the car is over £600, you'd be naive to think it will only cost you £400 or something after tax. Your tax bill doesn't really drop a lot unless you are getting them to give you an eco-warrior car which attracts a really low level of taxation.

scotsbob

You are sacrificing salary and if you are in a final salary pension scheme this will affect your pension.


At the end of the leasing period what will you have and what would your option be then?


If group insurance is included does it count towards "no claims" if you leave the scheme?


What happens to the leasing contract with the company scheme if you move to another company or have any long term illness?


As has ben stated by a previous poster, the company scheme benefits the company.


I don't have the reference to hand but one of the NHS unions has a fact sheet on the downsides of company leasing, I'm sure Google will help you find it.