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Where Taxpayers and Advisers Meet

Company Car and tax bands

AdrianBabb
Posts:2
Joined:Fri Jun 04, 2021 8:16 am
Company Car and tax bands

Postby AdrianBabb » Fri Jun 04, 2021 1:32 pm

Hi all, I’m hoping this is a simple question for someone with the right knowledge. I earn just enough to put me in the 40% tax bracket. My pay packet includes a car allowance of £4500 per annum. I’m considering taking the company car instead and am trying to work out the pay and tax implications of that.

The removal of the car allowance will take me comfortably back into the 20% bracket. Does that mean then when working out my company car tax with an online calculator my tax band will be basic rate 20%? Any advice would be much appreciated.

Lambs
Posts:1558
Joined:Wed Aug 06, 2008 3:15 pm

Re: Company Car and tax bands

Postby Lambs » Tue Jun 08, 2021 10:03 am

A,

The tax due on the company car will depend on the taxable benefit deemed to arise from its being made available to you for private use. It is a bit like the salary/car allowance you currently receive. If the benefit were only (say) £3,000pa then it might not exceed the HR Threshold and it would all be taxable at only 20%. If the taxable benefit proves to be (say) £6,000, then more of that benefit will be taxable at 40% than on the car allowance you pay now.

If and when you get a company car, depending on how the company deals with notifying HMRC, it may take a while for that to filter through to your monthly "pay packet". The company may start to make a deduction automatically, or it may instead notify HMRC who will in turn change your tax code to deduct more tax every month.

Company car benefits can be "expensive": the benefit is based on the list price of the vehicle when new, so even if you got a 10-year-old banger worth only £5,000, you would still be taxed as if it were a brand new vehicle. Also, it is generally based on the vehicle's CO2 emissions and the percentage applied creeps up a little every couple of years or so. Finally, the taxable benefit applies whether you do 10 private miles a year, or 10,000 private miles. While your daily commute generally "counts" as private mileage, it can feel very unfair. Having said that, you don't suffer Employees' NICs on the company car benefit - unlike with simple salary / car allowance.

I trust this is useful.

Regards,

Lambs

AdrianBabb
Posts:2
Joined:Fri Jun 04, 2021 8:16 am

Re: Company Car and tax bands

Postby AdrianBabb » Tue Jun 08, 2021 11:07 am

Oh I see, so let’s say for instance my pay salary less car allowance is £46,000. And the car I choose has a taxable list price of £27,271 I’d be paying 20% on the first £4271, and 40% on the remaining £23000. Is that how it works? Just asking as no online company car tax calculator I’ve seen allows you to split the amount amongst the tax brackets.

Lambs
Posts:1558
Joined:Wed Aug 06, 2008 3:15 pm

Re: Company Car and tax bands

Postby Lambs » Tue Jun 08, 2021 12:34 pm

A,

The benefit in kind is calculated by applying a percentage to the car's list price when new. The percentage rises depending on the car's CO2 emissions, to a maximum of 37%. If we assume that the car's list price is £27,271 and its official CO2 emissions mean the relevant percentage is 20%, then the annual Benefit in Kind tax charge will be 20% x £27,271 = £5,454. This would be the amount to add to the "base" salary of £46,000. In 2021/22 the Higher Rate Threshold is £50,270, so, in this case:

£4,270 @ 20% +
£1,184 @ 40%

- would give you the Income Tax charge on the company car benefit for 2021/22.

I trust this is useful.

Regards,

Lambs

darthblingbling
Posts:408
Joined:Wed Aug 02, 2017 9:09 pm

Re: Company Car and tax bands

Postby darthblingbling » Tue Jun 08, 2021 5:56 pm

I should note that Optional Remuneration Arrangements may mean that you are taxed on the higher of the allowance you are giving up, or the car benefit value as calculated normally.

Lambs
Posts:1558
Joined:Wed Aug 06, 2008 3:15 pm

Re: Company Car and tax bands

Postby Lambs » Tue Jun 08, 2021 9:38 pm

D,

Thank you for pointing that out. Yes, if the car benefit is actually lower than the salary ("car allowance") you are giving up, then you will be subject to tax on the higher amount - the car allowance - under the "salary sacrifice" rules that came in, from April 2017. This is HMRC's way of making sure that it doesn't lose out even if your employer is trying to be helpful/flexible.

Regards,

Lambs


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