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If you are earning just below the 40% tax threshold at say £31500 then you pay a 20% BIK on your company car and fuel. Say this currently costs £60 a month for the vehicle and £60 for the fuel.
You then get a pay rise of £1000 (£83.00 a month before tax) taking you over the threshold. You know pay 40% tax on everything above the threshold so in reality your additional take home pay would be £600 less NIC (£50 a month). On top of this you now have moved into the new tax bracket so have to pay 40% BIK on your company car and fuel which would equate to an additional £120 a month. This means you are paying an additional £1440 tax (BIK)a month on top of 40% on everything you earn above the threshold.
My question really is that you are going to need a substantial payrise (in the region of £3000) to make it worthwhile otherwise any increases in take home pay are going to be swallowed by additional tax and BIK on your company car.
Is this correct? I have simplified the figures and threshold but it doesnt seem right that a pay increase can you lead to you taking home less because of tax implications.
Thanks in advance for your help!
Yes. Seen this situation. Last time I think the company agreed to up the guy salary so he was no worse off. But that was very much discretionary.
You've got a £10k tax free allowance, the 40% tax rate doesn't come in until £41,865.
Another option in situations like this is to stick a bit more in your pension to bring your take home pay back below the limit.
What njee20 said, you're along way off 40%.
njee20 - cheers for that I didnt realise that the £10K tax free allowance was added to the 20% band meaning that you were still on 20% until you got to £41,865.
Makes things a bit simpler then but I assume that same issue can still occur once you hit the higher rate but on a smaller scale.
Yep!
[url= http://comcar.co.uk/newcar/companycar/taxcalc/g1select.cfm?clk=424 ]Comcar [/url] has a useful calculator for company car tax.
You don't actually pay 40% company car tax - you pay 20%. The car tax comes off the personal allowance portion of your salary, and over that comes off your 20%.
Effectively what it does is reduce your allowances, so if you earn 32k, and have 10k of company car tax liability you would effectively have a 42k salary, so you would just have to pay 40% on the extra £400 odd over and above the threshold. You don't pay a load more on the car.
The situation of paying a load more tax on benefits when you hit 40% doesn't actually happen as you are just paying more over and above the threshold, but the 40% rate is used as a figure for comparison as that's effectively what the car is costing you. Just had this conversation with the accountant!
Cheers numbnut I did use that but it seemed different to the Lex autolease one. The difference was that I didnt realise that the first £10k was still tax free so I inputted 40% tax into the calculator where as in comcar I put in the salary!
Are you doing enough private miles to justify paying for the fuel allowance?
Just a thought on saving a bit.
Yeh we live in the middle of the country and wifes family are in north yorkshire and my family are in kent so we do a lot of private miles up and down the country.
Wasnt looking to save money - was actually looking at changing job but current employer might offer a pay rise so trying to calculate the financial impact of moving to a higher paid job but without cmpany car vs being offered a pay rise where I currently am.
Get a hybrid, you pay very little if any company car tax. I've got a merc e class estate, hybrid, company car tax is £40 a month only because of extras added. Last car had same purchase price but car tax was £440 a month!
An E class hybrid for £40/month in tax!? That's less than I pay on a basic Leon at 20%!!