Net Adjusted Income - Company Cars

Complex

Hi, 

With the budget announcements yesterday relating to free childcare it has got me wondering how net adjusted income can be managed in order to fall below £100k pa (excluding pension contributions). I appreciate there will be a number of small violins playing for individuals that have this frustration but personally I still find it odd this is an individual test as opposed to a household i.e. a household with two individuals, one person earning £101k and the second earning £15k (£116k combined household income) are not entitled to free child care but a household with two individuals earning £99k (£198k combined household income) are entitled to free child care, utterly bonkers!? 

I am led to believe company cars can have an impact on net adjusted income and I'm keen to explore this further if anyone can assist with their advice? I currently receive a company car allowance £6k, but could opt to instead receive an electric company car (low BIK). Is it wise to take an electric company car and would this have the effect of reducing my income by the £6k of car allowance, noting I'd have to recognise the BIK in a tax return? 

I also have the option to go through a salary sacrifice scheme again, purchasing an electric car which doesn't impact the car allowance but equates to c£800pm of salary sacrifice.

Which is the best option and is there an easy guide/ explanation to how this works and actually is there even a potential benefit to reducing the net adjusted income? 

Appreciate any help anyone can provide. 

Thanks. 

norsefox

Complex said:

Hi, 

With the budget announcements yesterday relating to free childcare it has got me wondering how net adjusted income can be managed in order to fall below £100k pa (excluding pension contributions). I appreciate there will be a number of small violins playing for individuals that have this frustration but personally I still find it odd this is an individual test as opposed to a household i.e. a household with two individuals, one person earning £101k and the second earning £15k (£116k combined household income) are not entitled to free child care but a household with two individuals earning £99k (£198k combined household income) are entitled to free child care, utterly bonkers!? 

I am led to believe company cars can have an impact on net adjusted income and I'm keen to explore this further if anyone can assist with their advice? I currently receive a company car allowance £6k, but could opt to instead receive an electric company car (low BIK). Is it wise to take an electric company car and would this have the effect of reducing my income by the £6k of car allowance, noting I'd have to recognise the BIK in a tax return? 

I also have the option to go through a salary sacrifice scheme again, purchasing an electric car which doesn't impact the car allowance but equates to c£800pm of salary sacrifice.

Which is the best option and is there an easy guide/ explanation to how this works and actually is there even a potential benefit to reducing the net adjusted income? 

Appreciate any help anyone can provide. 

Thanks. 

Your car allowance is just salary by another name.  

If you take a company electric vehicle, the impact is dependent on the arrangement. 

First of all, does it actually suit you to have an electric car?  What do you spend the £6k on at the moment?

What kind of car are you looking at for £800 salary sacrifice?  That's £9,600 per year which is an expensive lease.  There are plenty of electric car leasing options at gross (VAT included) that are substantially less than that value.

Also, do you mean 'purchasing' or do you mean acquiring/leasing?

If your company is looking at financing/purchasing an EV then 'renting' to you with a possibility of disposing it through a sale to you at the future market rate, that is far more attractive than just simply a leasing arranged through SS.

Overall, EVs can be a useful method of reducing gross income for any number of purposes, but ultimately you need to decide if the EV is actually something you need - otherwise increasing pension contributions or even getting a new bike might be more appropriate.

I am also in a similar position to you, and opted to SS a Renault Megane through my employer.  It costs around £6.6k per year, and the company purchased the vehicle.  My contributions + company NI savings are roughly aligned with car depreciating/servicing/insurance costs, with the view that I'll buy it from them at some point in the future. 

As it's purchased, the company also gets a £40k first year capital allowance of 100%, meaning it saves 19% x £40k = £7,600 in Corp Tax (minus any paid in the future when it disposes of the vehicle).

[Deleted User]

The IFS has today stated that parents with two children under 3 would be better off earning £99000 than they would be earning £134000. 

The complete insanity of our system! 

Jeremy535897

They want older people to back to work. If you were a retired 60 year old with a nice pension of £100,000, and you went back to work, your effective tax and NIC rate on a modest £25,000 would be 72%. If you were a latecomer to fatherhood it would be even worse. Some incentive!

[Deleted User]

Jeremy535897 said:

They want older people to back to work. If you were a retired 60 year old with a nice pension of £100,000, and you went back to work, your effective tax and NIC rate on a modest £25,000 would be 72%. If you were a latecomer to fatherhood it would be even worse. Some incentive!

£100000 is some pension. In my years dealing with doctor’s pensions the highest I came across was £70000 (they used to be able to buy added years). A 1.8 million ‘pot’ equates to £78000 annual pension maximum but most took an increased lump sum. But your point is very valid. 

Jeremy535897

[Deleted User] said:

Jeremy535897 said:

They want older people to back to work. If you were a retired 60 year old with a nice pension of £100,000, and you went back to work, your effective tax and NIC rate on a modest £25,000 would be 72%. If you were a latecomer to fatherhood it would be even worse. Some incentive!

£100000 is some pension. In my years dealing with doctor’s pensions the highest I came across was £70000 (they used to be able to buy added years). A 1.8 million ‘pot’ equates to £78000 annual pension maximum but most took an increased lump sum. But your point is very valid. 

It's not a lot for a DB scheme for a director of a biggish company. Also it could be £70,000 pension and £30,000 investment income.

Complex

norsefox said:

Complex said:

Hi, 

With the budget announcements yesterday relating to free childcare it has got me wondering how net adjusted income can be managed in order to fall below £100k pa (excluding pension contributions). I appreciate there will be a number of small violins playing for individuals that have this frustration but personally I still find it odd this is an individual test as opposed to a household i.e. a household with two individuals, one person earning £101k and the second earning £15k (£116k combined household income) are not entitled to free child care but a household with two individuals earning £99k (£198k combined household income) are entitled to free child care, utterly bonkers!? 

I am led to believe company cars can have an impact on net adjusted income and I'm keen to explore this further if anyone can assist with their advice? I currently receive a company car allowance £6k, but could opt to instead receive an electric company car (low BIK). Is it wise to take an electric company car and would this have the effect of reducing my income by the £6k of car allowance, noting I'd have to recognise the BIK in a tax return? 

I also have the option to go through a salary sacrifice scheme again, purchasing an electric car which doesn't impact the car allowance but equates to c£800pm of salary sacrifice.

Which is the best option and is there an easy guide/ explanation to how this works and actually is there even a potential benefit to reducing the net adjusted income? 

Appreciate any help anyone can provide. 

Thanks. 

Your car allowance is just salary by another name.  

If you take a company electric vehicle, the impact is dependent on the arrangement. 

First of all, does it actually suit you to have an electric car?  What do you spend the £6k on at the moment?

What kind of car are you looking at for £800 salary sacrifice?  That's £9,600 per year which is an expensive lease.  There are plenty of electric car leasing options at gross (VAT included) that are substantially less than that value.

Also, do you mean 'purchasing' or do you mean acquiring/leasing?

If your company is looking at financing/purchasing an EV then 'renting' to you with a possibility of disposing it through a sale to you at the future market rate, that is far more attractive than just simply a leasing arranged through SS.

Overall, EVs can be a useful method of reducing gross income for any number of purposes, but ultimately you need to decide if the EV is actually something you need - otherwise increasing pension contributions or even getting a new bike might be more appropriate.

I am also in a similar position to you, and opted to SS a Renault Megane through my employer.  It costs around £6.6k per year, and the company purchased the vehicle.  My contributions + company NI savings are roughly aligned with car depreciating/servicing/insurance costs, with the view that I'll buy it from them at some point in the future. 

As it's purchased, the company also gets a £40k first year capital allowance of 100%, meaning it saves 19% x £40k = £7,600 in Corp Tax (minus any paid in the future when it disposes of the vehicle).

Hi,

I think the trouble I'm having is understanding the difference in the two. The numbers used are indicative only. 

Option 1: Company car or car allowance

Whilst I appreciate car allowance is just treated as taxable income, reading online appears to suggest that if you opt for a company car which attracts BIK tax (which is very low on EVs) then you would still pay tax on the higher amount i.e. a company car may attract £60 p/m in BIK but the car allowance that has been forgone would be c£500 per month. Therefore the tax you pay is on the £500 per month even though you don't receive company car allowance? Reference site below. 

https://www.clm.co.uk/company-car-tax/#:~:text=If you choose to forego,Kind value of the car.

Therefore, in respect of option 1, it doesn't feel like there is any benefit at all in choosing one or the other for the purposes of tax. 

Option 2: Retain car allowance and utilise a salary sacrifice scheme. 

Clearly the car allowance would be taxable as if it were income. However, through the salary sacrifice it brings your salary down, meaning the net effect for an EV could be c£600pm. However, the salary could reduce by £1,200 pm. In a scenario where car allowance is £6,000 per annum and a salary sacrifice is £14,400 per annum (actual real impact to cash in the pocket £7,200) then the net adjusted income should benefit by some £8,400? Or am I mistaken? 

Thanks for all the help. 

Jeremy535897

The short answer is that the rules for substituting the higher amount quoted in your link don't apply where the vehicle on which the benefit arises is an EV. You can read the long answer here:
https://www.legislation.gov.uk/ukpga/2003/1/section/120A

Complex

Jeremy535897 said:

The short answer is that the rules for substituting the higher amount quoted in your link don't apply where the vehicle on which the benefit arises is an EV. You can read the long answer here:
https://www.legislation.gov.uk/ukpga/2003/1/section/120A

Thanks Jeremy, that is really helpful. Would you be able to point me to the provision that states this just for reference? 

Jeremy535897

That's in the link I mentioned above to section 120A ITEPA 2003:

"Section 120A Benefit of car treated as earnings: optional remuneration arrangements

(1)Where this Chapter applies to a car in relation to a particular tax year and the conditions in subsection (3) are met—

(a)the relevant amount (see section 121A) is to be treated as earnings from the employment for that tax year, and

(b)section 120(1) does not apply. [see below]

(2)In such a case (including a case where the relevant amount is nil) the employee is referred to in this Chapter as being chargeable to tax in respect of the car in the tax year.

(3)The conditions are that—

(a)the car is made available to the employee or member of the employee's household pursuant to optional remuneration arrangements,

(b)the total foregone amount in connection with the car for the tax year is greater than the modified cash equivalent of the benefit of the car for the tax year (see section 121B), and

(c)the car's CO2 emissions figure (see sections 133 to 138) exceeds 75 grams per kilometre. [my bold italics]

(4)In this section, and in section 121A, the total foregone amount in connection with the car for a tax year is the total of—

(a)the amount foregone (see section 69B) with respect to the benefit of the car for that year, and

(b)the amount foregone (see section 69B) with respect to each other benefit that—

(i)is connected with the car,

(ii)is provided in that year for the employee, or a member of the employee's household, pursuant to optional remuneration arrangements, and

(iii)is neither the provision of a driver nor the provision of fuel."

Section 120(1) says:

"Section 120 Benefit of car treated as earnings

(1)If this Chapter applies to a car in relation to a particular tax year, the cash equivalent of the benefit of the car is to be treated as earnings from the employment for that year."

That is the basic charging provision. Section 120A then disapplies it where the conditions are met, in favour of taxing a higher cash amount foregone. Section 120A(3)(c) then stops section 120A applying where EVs (or other vehicles with emissions not exceeding 75 grams per kilometre) are involved.