BIK 40% or not?

The tax you pay is calculated on a cumulative basis, working out tax on your income in the year to date; tax in the month is worked out at this month's cumulative tax due, less tax already paid in the year to date. Example:

Let's say pay in April (first month of the tax year) was £3,000 and no bonus - and let's also assume for simplicity you get the full personal allowance of £11,850 for the year. The marginal tax rate is worked out by pro-rating income in the period of £3,000 that up to a year - so an annual salary of £36,000 is well within the 20% tax band and so tax is calculated at 20% after deducting the personal allowance.

In May, let's assume a salary of £3,000 but a bonus of £5,000. That's income of £8,000 in the month, and £11,000 in the tax year to date (2 months). Pro-rated, that is an income of £66,000 for the full year, pushing you into the 40% tax bracket for income over £46,350.

In June, assume no bonus and a salary of £3,000. Now your total income for the year is £14,000 in three months, which equates to £42,000 for the year. With a personal allowance of £11,850, that puts you back into the 20% tax bracket.

So the amount of tax you pay and the tax bracket you fall into may vary between the 20% rate or the 40% rate, depending on when you get bonuses. But overall by the end of the year, as everything is done on a cumulative basis, the right amount of tax should have been deducted. If in any period you have paid a higher rate of tax because of a periodic bonus, the following month should see less tax paid when the cumulative figures are calculated.

(I used to work for a company who paid annual bonuses in April so we always used to get a hefty chunk of that bonus disappear in tax - HMRC doesn't know it's an annual bonus, they only know that you had a bumper pay day in April, so the tax calculation treats it like you got that level of income each month. But in subsequent months, when salary reverted to 'normal' levels, we ended up paying less tax in the month because we'd effectively overpaid in April.)

So to sort of answer your question, if your total income of salary, bonuses and value of benefit in kind (company car) puts you over £46,350 in a tax year, then you will pay tax at 40% on the income over that BUT depending on the size and timing of the bonus, some months you may pay tax at 20% on all your income, and in some months you may pay tax at 40% on the amount that pushes you over the limit.

As to why your deductions have gone up - has anything changed e.g. a different company car which has a higher value, or have you just got a company car for the first time? Has HMRC assessed your income for the last year, decided you paid too little tax and adjusted your code to collect the unpaid tax?

In my experience, HMRC roll forward information from one tax year to another so if you have a company car, they keep adjusting your tax code to reflect the financial benefit of that unless your employer tells them otherwise.

john23lloyd wrote: »

My personal allowance has been reduced by £10k for my company car.

Car only or car and fuel benefit?

£10K for car and fuel benefit sounds like it could be right. Mine is about £11,500 on a mid-range 1.6 diesel.

The list price of a 520 M Sport is around £40k, so depending on the exact version and CO2 emissions figure then a BIK value of £10200 without fuel sounds about right.

At 20% you will pay £2040 in tax, at 40% you will pay £4080 in tax. However you only pay 40% on the excess amount of income and BIK over your basic rate band. You won't pay 40% on the whole lot simply by straying into the higher rate band by a few pounds.

The £10200 doesn't change depending on your tax rate. It is calculated based solely on the list price of the car and it's CO2 emissions. You are then taxed on this £10200 by the PAYE system on top of your salary and bonuses.

If you only had use of the car from March onwards then it sounds like you may have been over taxed on the car in the previous tax year. Did you have use of another company car before this one?

The adjustment to your tax code is worked out independently of what you earn. Whether you earned £20k or £200k, the adjustment would be the same. So the question is whether or not the adjustment is correct for the car in question. £10,200 sounds maybe a bit high, depending on the full spec, but £5k would definitely have been too low. My suspicion is that you paid too little tax last year, so they've increased your tax slightly this year. In any case you should have received a tax code notice that would have explained how they worked it out.