Question on personal allowance with >£100k salary and car/fuel benefits

jkg4

Hi - I'm hoping someone may be able to help me!

I spent nearly an hour on hold with HMRC yesterday, and after having spoken to two different people - who at best were rude and at worst borderline aggresive - I'm still no clearer...

I recently moved to a new role. My salary is £101,970. I have a company car and fuel, and private medical cover which are worth £12,138. I also have a prior year tax underpayment worth £2,086.

I've entered my salary into my personal tax account on the HMRC website, and I've also entered the values for my benefits of £12,138.

I know that for every £2 over £100k I earn, I will lose £1 of the personal allowance. Therefore in my head, this is the following calculation that needs to occur to calculate my personal allowance:

Annual Salary: £101,970

Earnings above £100k: £1,970

£1 of every £2 over £100k: £985

Standard personal allowance: £12,570

Less deduction: -£985

New personal allowance: £11,585

I then know the benefits I have need to be deducted from this remaining personal allowance, alongside my underpayment of tax from last year, so:

New personal allowance: £11,585

Less benefits: -£12,138

Less underpayment: -£2,086

Total tax-free amount: -£2,639

This would then be used to generate my tax-code.

HOWEVER, this is what HMRC are doing:

Annual Salary: £101,970

Plus benefits: £12,138

Total taxable amount: £114,108

Earnings above £100k: £14,108

£1 of every £2 over £100k: £7,054

Standard personal allowance: £12,570

Less deduction: £7,054

New personal allowance: £5,516

I then know the benefits I have need to be deducted from this remaining personal allowance, alongside my underpayment of tax from last year, so:

New personal allowance: £5,516

Less benefits: £12,138

Less underpayment: £2,086

Total tax-free amount: -£8,708

In the HMRC calculation, I believe I'm basically being taxed twice on my benefits. Firstly, they're adding the value of those benefits to my salary to inflate my earnings, and then deducting that from my standard personal allowance. And then, they're deducting those benefits again from my remaining personal allowance. I therefore believe I'm being taxed twice on this - and it's worth about £6,000 per year! I spent ages trying to explain this to two different people over the phone yesterday to be told I was wrong, and that's what the system says, so it must be right.

Am I going mad?! Does anyone have enough knowledge of this to confirm either way if I'm correct or not? And if I am, how on earth I go about not spending the next 11 months being hugely over-taxed?

Thanks so much in advance if anyone is able to help!

Dazed_and_C0nfused

You are massively overcomplicating things.

Firstly salary is often irrelevant for tax purposes.  It's taxable pay, sometime significantly less than salary, which counts.

But let's say your taxable pay (expected P60 pay value) is £101,970.

You then need to calculate your adjusted net income to know your Personal Allowance.  For simplicity let's say that your only taxable income is the pay plus benefits so £114,108.  And there are no Gift Aid or RAS pension contributions to factor in.

That means your Personal Allowance will be (estimated) as £5,516 (£114,108 less £100,000 = £14,108 / 2 = £7,054.  £12,570 less £7,054 = £5,516).

Could you clarify one thing regarding the underpayment though.  An underpayment of £2,086 for someone earning ~£114k should result in tax code deduction of £5,215.

Is it possible you actually owe £834 not £2,086?  Otherwise something is very wrong!

jkg4

Dazed_and_C0nfused said:

You are massively overcomplicating things.

Firstly salary is often irrelevant for tax purposes.  It's taxable pay, sometime significantly less than salary, which counts.

But let's say your taxable pay (expected P60 pay value) is £101,970.

You then need to calculate your adjusted net income to know your Personal Allowance.  For simplicity let's say that your only taxable income is the pay plus benefits so £114,108.  And there are no Gift Aid or RAS pension contributions to factor in.

That means your Personal Allowance will be (estimated) as £5,516 (£114,108 less £100,000 = £14,108 / 2 = £7,054.  £12,570 less £7,054 = £5,516).

Could you clarify one thing regarding the underpayment though.  An underpayment of £2,086 for someone earning ~£114k should result in tax code deduction of £5,215.

Is it possible you actually owe £834 not £2,086?  Otherwise something is very wrong!

Sorry yes, my actual tax underpayment is £834 - the £2,086 is the grossed up value to be deducted from my allowance.


Am I incorrect in thinking I'm essentially being taxed twice then? I understand exactly where they've got the £5,516 from - I just don't understand why it's fair to reduce my personal allowance by adding that to my taxable income. By adding the two together, they're calculating a much larger figure to deduct from my personal allowance of £12,570 - and THEN they're deducting all of the benefits off again to come up with the final tax-free amount.

So I'm being penalised on my personal allowance reduction - and then being taxed for the benefits.

Dazed_and_C0nfused

jkg4 said:

Dazed_and_C0nfused said:

You are massively overcomplicating things.

Firstly salary is often irrelevant for tax purposes.  It's taxable pay, sometime significantly less than salary, which counts.

But let's say your taxable pay (expected P60 pay value) is £101,970.

You then need to calculate your adjusted net income to know your Personal Allowance.  For simplicity let's say that your only taxable income is the pay plus benefits so £114,108.  And there are no Gift Aid or RAS pension contributions to factor in.

That means your Personal Allowance will be (estimated) as £5,516 (£114,108 less £100,000 = £14,108 / 2 = £7,054.  £12,570 less £7,054 = £5,516).

Could you clarify one thing regarding the underpayment though.  An underpayment of £2,086 for someone earning ~£114k should result in tax code deduction of £5,215.

Is it possible you actually owe £834 not £2,086?  Otherwise something is very wrong!

Sorry yes, my actual tax underpayment is £834 - the £2,086 is the grossed up value to be deducted from my allowance.


Am I incorrect in thinking I'm essentially being taxed twice then? I understand exactly where they've got the £5,516 from - I just don't understand why it's fair to reduce my personal allowance by adding that to my taxable income. By adding the two together, they're calculating a much larger figure to deduct from my personal allowance of £12,570 - and THEN they're deducting all of the benefits off again to come up with the final tax-free amount.

So I'm being penalised on my personal allowance reduction - and then being taxed for the benefits.

In my opinion you aren't being taxed twice.

But income in the £100-£125k range has an effective tax rate of 60%.

40% tax you are actually charged on the income.  

And an extra 20% because you are losing £1 of Personal Allowance for each £2 of adjusted net income.

This is where pension contributions are very tax efficient.

[Deleted User]

Is the taxable salary £101970 or is that the gross salary before pension contributions (about which we need to know the type of contribution)?

jkg4

[Deleted User] said:

Is the taxable salary £101970 or is that the gross salary before pension contributions (about which we need to know the type of contribution)?

The £101,970 is post-pension contributions. My actual salary is £113,300, but I do a 10% pension salary sacrifice. 

Albermarle

jkg4 said:

purdyoaten2 said:

Is the taxable salary £101970 or is that the gross salary before pension contributions (about which we need to know the type of contribution)?

The £101,970 is post-pension contributions. My actual salary is £113,300, but I do a 10% pension salary sacrifice. 

The most obvious response is why not just increase your salary sacrifice to 25% ? with the added benefit of building up a bigger pension pot quicker.
It might seem a lot but it will not cost you anything like that, due to the tax savings.

[Deleted User]

Albermarle said:

jkg4 said:

purdyoaten2 said:

Is the taxable salary £101970 or is that the gross salary before pension contributions (about which we need to know the type of contribution)?

The £101,970 is post-pension contributions. My actual salary is £113,300, but I do a 10% pension salary sacrifice. 

The most obvious response is why not just increase your salary sacrifice to 25% ? with the added benefit of building up a bigger pension pot quicker.
It might seem a lot but it will not cost you anything like that, due to the tax savings.

Gross salary £113300 plus benefits £12138 = £125138. So salary sacrifice needs to be at least £25138. £25138/£113300 = 22.18%. 25% gives some room for manoeuvre.