Company Car Tax - 40% Tax Confusion

GlassPanda

Evening all

I have a company car and my understanding of how this is taxed is that you pay either 20% or 40% of the P11D value depending on what tax bracket I'm in. I have recently had an inflation payrise that has JUST (by 10's of pounds) taken me into the 40% pay bracket. This effectively means my inflation pay rise is less than half of what it theoretically should be as I'll now be paying twice as much for my car.

Not withstanding that I will pay more into my pension via salary sacrifice to drop me back down, is it right that irrespective of how much into the 40% tax bracket I earn I have to pay 40% tax on the car? It seems rather daft that I'd be paying the same car tax as someone on £40k more than me because I'm now in the 40% bracket. I'm not missing something whereby it's linked in some way to actual salary am I? Is it purely done on the tax bracket?

Hoping someone can clarify this for me before I gotoo far down the rabbit hole looking for a solution.

Thanks in advance 

Dazed_and_C0nfused

I have a company car and my understanding of how this is taxed is that you pay either 20% or 40% of the P11D value depending on what tax bracket I'm in.

That's completely wrong.

The benefit is simply additional taxable income.

So if your taxable income was say £48,000 pay (P60 pay figure) and car benefit of £5,000 you would pay some 20% tax and some 40% tax on the benefit.

That's assuming you aren't Scottish resident for tax purposes.

[Deleted User]

GlassPanda said:

Evening all

 I have recently had an inflation payrise that has JUST (by 10's of pounds) taken me into the 40% pay bracket. 

Which means that you will be paying 40% tax on only the ‘10’s of pounds’ that has taken you above the higher rate threshold of 50270. 

GlassPanda

Thanks for the replys. I'd taken my understanding from some research done online. The Carbuyer website has a good example:

"For any make, model and type of car, the above calculation is applied. As an example, let’s take a petrol BMW 3 Series saloon that has a P11D value of £32,985 and falls into the BiK band of 33% due to CO2 emissions of 144g/km of CO2. The value of the car for company-car tax purposes is £10,995 (33% of £32,985).

If you live in England or Wales, the amount of company car tax you pay depends on whether you’re a 20%, 40% or 45% income-tax payer. You’ll pay HMRC a percentage of £10,995 based on the rate of income tax you pay; in this case, either £2,199, £4,398 or £4,948 a year respectively."

By this example, a 40% tax payer pays double that of the 20% tax payer. It doesn't say anything about it being a proportion. Is this wrong then?

Dazed_and_C0nfused

GlassPanda said:

Thanks for the replys. I'd taken my understanding from some research done online. The Carbuyer website has a good example:

"For any make, model and type of car, the above calculation is applied. As an example, let’s take a petrol BMW 3 Series saloon that has a P11D value of £32,985 and falls into the BiK band of 33% due to CO2 emissions of 144g/km of CO2. The value of the car for company-car tax purposes is £10,995 (33% of £32,985).

If you live in England or Wales, the amount of company car tax you pay depends on whether you’re a 20%, 40% or 45% income-tax payer. You’ll pay HMRC a percentage of £10,995 based on the rate of income tax you pay; in this case, either £2,199, £4,398 or £4,948 a year respectively."

By this example, a 40% tax payer pays double that of the 20% tax payer. It doesn't say anything about it being a proportion. Is this wrong then?

Yes, a massive over-simplification.

Let's your other taxable income is £50,000 so you don't currently pay any 40% tax. 

Then you get a company car with a benefit of £10,995.  You will pay a little bit of 20% tax and a lot of 40% tax on the car benefit.  You can't pay 20% tax on the whole £10,995 just because the first little bit happens to be taxed at 20%.

But if your taxable income was £40,000 then you'd pay a lot of 20% tax and not much 40% tax on it.

It all depends on what your overall taxable income is.  No different if you simply got a pay rise instead of a company car.

GlassPanda

Right. Think I'm getting that I've had it all wrong. I was also confused that when ordering the car it was giving me a representative figure I would pay at either 20% or 40%, with one double the other.

Based on the responses here, the only way I would be paying the full 40% on the car is if my salary was £50,270+ which makes much more sense.

[Deleted User]

GlassPanda said:

Right. Think I'm getting that I've had it all wrong. I was also confused that when ordering the car it was giving me a representative figure I would pay at either 20% or 40%, with one double the other.

Based on the responses here, the only way I would be paying the full 40% on the car is if my salary was £50,270+ which makes much more sense.

Correct. Unfortunately, as Dazed says, the simplification on reputable websites is anything but helpful - I note that the RAC makes the same wrong assumptions that tax is all charged at one rate. 

https://www.rac.co.uk/business/news-advice/how-does-company-car-tax-work

DullGreyGuy

[Deleted User] said:

GlassPanda said:

Right. Think I'm getting that I've had it all wrong. I was also confused that when ordering the car it was giving me a representative figure I would pay at either 20% or 40%, with one double the other.

Based on the responses here, the only way I would be paying the full 40% on the car is if my salary was £50,270+ which makes much more sense.

Correct. Unfortunately, as Dazed says, the simplification on reputable websites is anything but helpful - I note that the RAC makes the same wrong assumptions that tax is all charged at one rate. 

https://www.rac.co.uk/business/news-advice/how-does-company-car-tax-work

Unless you are looking at a decent tax website I suspect you'll find almost every website will simply it and not talk about what is probably the minority that sit on the borderline of the two bands and so pay something between the two